report no: t 7345-ru public disclosure authorized · 1998 9.355 20.650 1999* 24.130 26.555 * as of...

Document of

The World Bank

Report No: T 7345-RU

TECHNICAL ANNEX TO THE

MEMORANDUM OF THE PRESIDENT

RUSSIAN FEDERATION

REGIONAL FISCAL TECHNICAL ASSISTANCE PROJECT

November 30, 1999

Poverty Reduction and Economic Management UnitEastem Europe and Central Asia

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CURRENCY EQUIVALENTS

Currency Unit = New Ruble (Rb)

MICEX Exchange RatesNew Ruble per US$1

Period Average End of Period1995 4.566 4.6401996 5.129 5.5541997 5.785 5.9741998 9.355 20.6501999* 24.130 26.555

* As of November 30, 1999

ABBREVIATIONS AND ACRONYMS

FER Foundation for Enterprise RestructuringCAS Country Assistance StrategyEHDP Enterprise Housing Divestiture ProjectGDP Gross Domestic ProductGOR Government of RussiaFMD Fiscal Monitoring DivisionIMWG Inter-Ministerial Working GroupLIBOR London Inter-Bank Offered RateMOF Ministry of FinanceOED Operations Evaluation DepartmentPDL Portfolio Development LoanPHRD Program for Human Resources DevelopmentPMU Project Management UnitPPF Project Preparation FacilityRFTAP Regional Fiscal Technical Assistance ProjectSAL Structural Adjustment LoanSPIL Social Protection Implementation LoanTA Technical AssistanceTAL Technical Assistance LoanUSAID United States Agency for International Development

FISCAL YEARJuly I - June 30

Vice-President: Johannes F. LinnCountry Director: Michael F. Carter

Sector Director: Pradeep MitraTeam Leader: Lawrence M. HannahProject Team: Eugene Gurenko (Task Manager),

ECSIN; Douglas Sumerfield, MariaShkaratan, Stepan Titov, Benoit Bosquet,Helena Makarenko, ECSPE

RUSSIAN FEDERATIONREGIONAL FISCAL TECHNICAL ASSISTANCE PROJECT

TABLE OF CONTENTS

I. RATIONALE FOR BANK INVOLVEMENT .................................................... 1A. Major Impediments to the Reforms of Inter-Governmental Relations ...................1B. GOR Agenda for Inter-Governmental Fiscal Reform .............................................2C. Rationale for Bank Involvement .................................................... 3D. Lessons from Previous Bank Involvement ................................................... 3

II. THE PROJECT .................... ... .5A. Project Objectives ..................... 5B. Project Description .................... 5C. Summary Project Analysis ..................... 7D. Project Benefits .................... 8E. Project Risks .................... 8

III. PROJECT COST, FINANCING, MANAGEMENT AND IMPLEMENTATION ..... 10A. Project Cost ......................................................... 10B. Borrower's Financial Contribution ......................................................... 12C. Procurement .......................................................... 13D. Disbursements .......................................................... 15E. Project Implementation: Management Structure ..................................................... 17

ANNEXES

Annex 1. Performance and Monitoring Indicators ....................................................... 26Annex 2. Procurement Plan ......................................................... 28Annex 3. Terms of Reference for Technical Assistance .............................................. 33Annex 4. Supervision Plan .......................................................... 55Annex 5. Project Implementation Plan .......................................................... 57Annex 6. Report on Financial Management Systems .................................................. 60


I. RATIONALE FOR BANK INVOLVEMENT

A. Major Impediments to the Reforms of Inter-Government Fiscal Relations

1. Weak Fiscal and Structural Adjustment Reforms at the Sub-National LevelThe Russian Federation has undergone significant reforms in its system of inter-governmental fiscal relations since the beginning of the transition. The Budget Code,approved by the Duma in 1998, and Part I of the Tax Code', which went into effect inJanuary 1999 are examples of major Government efforts to reform fiscal managementand budgeting at the sub-national level, as well as the existing system of revenue and taxassignments. While the pace and depth of reforms had accelerated in the first half of1998, the August crisis brought these government efforts to an abrupt halt. However, in1999, the Government's attempts to reform inter-governmental fiscal relations havereceived a new, strong impetus. An Inter-Ministerial Working Group (IMWG) for Inter-Governmental Fiscal Reform has been formed and meets regularly, a Government FiscalConcept Paper has been approved and has been adhered to, and a working dialogue withthe regions on key issues of inter-governmental reform has been resumed. Yet, Russia'sfiscal and structural adjustment reforms at the sub-national level have been alarminglyslow. In many instances the progress of federal fiscal reforms has been reversed by theincreased allocation of subsidies to the housing sector and enterprises from the regionaland municipal budgets. From small surpluses in the early 1990s, most regional budgetshave slipped into deficits. Sub-national government interest payments due in 1998amounted to about 0.74 percent of GDP, and much of this was never paid. The August17, 1998 ruble devaluation and the subsequent economic crisis triggered a chain ofdefaults by the regions on locally traded debt. As a result, a clear imbalance hasdeveloped between fiscal adjustment efforts at the federal and sub-national levels, posinga serious threat to Russia's macroeconomic stability and impairing national economicgrowth. At present, the Government's efforts to accelerate fiscal and structural reforms atthe sub-national level are being hampered by three issues:

* Deficient Legal Framework* The current inter-governmental legal framework doesnot provide incentives throughout the multi-tiered fiscal system for effective taxcollection, efficient allocation of public resources, and financially responsibleborrowing. Lack of clarity in expenditure assignments and the extensive use ofunfinded expenditure mandates from upper-level governments promote inefficientexpenditure patterns and fiscally irresponsible behavior. In addition, the overall legalframework governing the system of inter-governmental fiscal relations is riddled withinconsistencies and contradictions.

l Part II of the Tax Code is still under discussion.

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* Poor Compliance. Although over the past six years many laws have been passed onbudgeting and financial management, revenue sharing, transfers, and assignment offunctional responsibilities, there has been considerable variation in the degree ofcompliance with these laws by the regions. Enforcement of these laws remains weak.In some cases, the laws have been little more than proclamations, with essentially noimplementation.

* Weak Institutional Capacity The Government faces severe capacity constraints inthe design and implementation of inter-governmental fiscal reforms, as well as inmonitoring the compliance of the regions with federal regulations. The institutionalcapacity of the regions to implement fiscal and budgetary reforms is of even moreconcern, as the federal reform agenda grows ever more complex.

B. GOR Agenda for Inter-Governmental Fiscal Reform

2. The GOR recognizes that these issues must be addressed as part of its medium-termeconomic agenda. The GOR's medium-term economic strategy includes actions toeliminate unfunded mandates from the federal to sub-national governments, revise theformula for allocating federal equalization transfers to the regions, and develop aprogram to rationalize expenditure and tax assignments with the objectives ofestablishing a more stable and transparent system of inter-governmental finance andproviding a potential revenue base at each level of government commensurate with itsrespective responsibilities.

3. In order to implement its reform agenda in the area of inter-governmental fiscalrelations, the GOR requested Bank financing to support the following Governmentefforts:

• Promote legal reform of inter-governmental fiscal relations, including fiscalmanagement and budgeting, debt management, revenue and tax assignments,assignment of expenditures, and inter-governmental fiscal transfers;

* Build a powerful fiscal incentive mechanism to improve regional compliance withfederal rules and regulations. As part of this effort, the Project will support furtherBank efforts to promote fiscal and structural reforms in the regions;

* Improve regional institutional capacity to design, implement and monitor fiscalreforms. The Government believes the Bank can provide valuable technical support tothe Fiscal Monitoring Division of the Ministry of Finance (FMD), which would focuson monitoring regional compliance with Federal legislation and provide analyticalsupport and policy advice on inter-governmental fiscal issues to the Inter-MinisterialWorking Group for Fiscal Reform. In addition, the Government requested the Bank'sassistance in designing and implementing complex budgetary and structural reformsat the regional level required by the Government reform program.

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C. Rationale for Bank Involvement

4. The proposed Regional Fiscal Technical Assistance Project is fully consistent withthe objectives of the Russia Country Assistance Strategy (CAS) due to be presented to theBoard in conjunction with this operation, and with operational standards for projectquality in that it:

* responds to the Government's request for assistance in facilitating fiscal adjustment atthe sub-national level;

* contributes to the structural reform program by identifying the priorities of publicsector spending and expenditure programs for alternative provision by the privatesector;

* promotes more equitable and efficient public spending through improvements in thelegal framework of inter-governmental fiscal relations;

* builds institutional capacity for fiscal and economic management at the federal andsub-national levels, which is a key structural reform priority.

D. Lessons from Previous Bank Involvement

5. Major related projects financed by the Bank and/or other development agencies(completed, ongoing and planned) are described below:

Sector Issue Project Latest Supervision (Forn 590)Ratings (Bank-financed projects only)

Implementation DevelopmentProgress (IP) Objective (DO)

Bank-financed

Regional fiscal management Community Social U SInfrastructure Project (2 pilotregions will receive technicalassistance for financialmanagement

Reform of expenditure and debt Management Skills for Market S Smanagement Development Project (National

Training Foundation): publicfinance training component

Enterprise Housing Divestiture U SProject

Inter-govemmental fiscal relations SAL III U U

Other development agencies

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Reform of expenditure and debt UK Know How Fund N/A N/Amanagement

Inter-governmental fiscal relations USAID N/A N/Acomponent of tax reform project

Accounting Reform Intemational Center for N/A N/AAccounting Reformn

IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory)

6. The Bank brings experience with sub-national fiscal management, reform of inter-governmental fiscal relations, and reform of housing and communal services in othertransitional and middle-income countries. The proposed approach under the projectwould draw on Bank experience accumulated from previous operations (both adjustmentand investment projects), including those developed for other economies in transition.One important lesson from other Bank projects in Russia (e.g., EHDP, Urban Transport,Housing, and St. Petersburg Center City Rehabilitation Project) is that reformdevelopments at the sub-national level need to be closely monitored. Strengthening thegovernment monitoring capacity in this respect, is critical to successful projectimplementation.

7. Technical assistance loans (TALs) are traditionally among the weakest performersin the Bank's portfolio. While the causes of poorly performing Bank TALs are a sourceof continuing debate, OED's findings suggest that governance problems and weakmanagement have been two main reasons for their poor past performance. The Bank'sexperience with TALs in Russia underscores the importance of these lessons. In thisregard, workable governance structures and strong management have been the keyconsiderations in selecting a project implementation agency. The Foundation forEnterprise Restructuring has been selected as the PIU for the RFTAP. The FER hasdeveloped a strong project administration capacity, proven by an exemplary disbursementrecord and high quality of outputs. Its experience, however, highlights the need to settlethe project governance arrangements and initiate procurement as early as possible inorder to avoid delays in mobilization of technical assistance, which, in the case of theRFTAP, could jeopardize the government program of inter-governmental reform.

8. Fiscal adjustment and sectoral performance indicators, in particular those related tothe regional structural reform of the key sectors such as housing and transport, will bedeveloped based on the experience of various investment projects such as the EHDP.Reform programs recently developed by the IBRD under Public Resource ManagementLoans in Kazakhstan, Kyrgystan, and other FSU states will be also taken into account.Project preparation will benefit from smaller pieces of TA to regional governments inRussia, being funded under ongoing Bank projects (Community and Social Infrastructure,SPIL and Legal Reform).

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II. THE PROJECT

A. Project Objectives

9. The Regional Fiscal Technical Assistance Project (RFTAP) pursues the followingobjectives: build institutional capacity to advance the reform of inter-governmental fiscalrelations, and improve fiscal performance at the sub-national level. To meet theseobjectives the Project sets out four sub-goals:

• improve the legal framework for sub-national public finance and inter-governmentalfiscal relations;

* establish a mechanism for improving compliance with federal laws and regulations inthe area of fiscal management and promote fiscally responsible behavior at the sub-national level through appropriate economic incentives;

* strengthen the Government's capacity to monitor sub-national fiscal performance andreform efforts;

* strengthen the institutional capacity of sub-national governments to carry out fiscaland structural reforms.

10. Key policy and institutional reforms are the focus of the Project. The Projectwould: (i) promote the establishment of a stable, fair and predictable system of inter-governmental fiscal relations which would provide sub-national governments withappropriate incentives to undertake fiscal reforms; (ii) promote the use of modernaccounting and budgeting practices which will give a fair and representative view of thefinancial position of sub-national governments; (iii) support the development ofindividual regional reform programs to reduce deficit spending and improve theefficiency of budget expenditures at the sub-national level; and (iv) improve the overallfinancial stability and creditworthiness of participating sub-national governments.

B. Project Description

11. The Project will finance four components: (i) Strengthening Federal and RegionalFiscal Legislation; (ii) Strengthening Federal Monitoring Capacity: Fiscal MonitoringDivision and the PIU for the RFTAP; (iii) Assistance to Sub-National Governments inAccounting and Budgeting; and (iv) Sectoral Public Expenditure Reviews.

12. Strengthening Federal and Regional Fiscal Legislation (US$2.4 million).Development and implementation of the Government's fiscal reform will requiresubstantial efforts in improving the current legal framework for inter-governmentalrelations. Financing would be provided for local consultants and, as necessary,international experts to assist in the completion of relevant tasks. The legal and policyresearch efforts will be focused on high-priority themes such as inventory of the currentassignment of revenue and expenditures responsibilities between the federal, regional and

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local governments; design of formula-based equalization transfers for the regions; federalregulations for monitoring sub-national fiscal performance; and analysis of theconsistency and compatibility of existing legislation on sub-national public finance andinter-governmental fiscal relations. It is envisaged that the work under the componentwill be closely coordinated with the Legal Reform Project. In addition, the componentwill provide for additional flexibility to respond to requests from senior officials ondevelopments in the legal environment in the form of quick-response legal/policy notes.

13. Strengthening Federal Monitoring Capacity: Fiscal Monitoring Division andthe PIU for the RFTAP (US$14.8 million). The component would finance the provisionof technical assistance relating to the strengthening of institutional capacity for thedesign, implementation and monitoring of the fiscal and structural reforms andperformance at the sub-national level, through the financing of goods and services. Theseexpenditures would include: (i) computer and information technology needed for thestatistical analysis of regional data; (ii) the creation of a library and on-line databases onregional fiscal practices and the current legislation; (iii) development and disseminationof Principles (Code) of Good Practice for regional financial management as an extra legalstandard; (iv) design of financial disclosure requirements for sub-national and municipalborrowers; (v) ongoing monitoring of fiscal and structural reforms and performance at thesub-national level, as well as compliance with federal laws and regulations; (vi)analytical support and policy advice on key issues of inter-governmental fiscal reformand sub-national public finance; (vii) training, study tours for FMD staff and forgovernment staff (including regional policy-makers) participating in the project activitiesto develop modem analytical skills required for the implementation of fiscal reforms;(viii) office furnishing, administrative and computer support to the staff of the FMD andconsultants working on other project components.

14. The component includes a budget for conferences and seminars on inter-governmental issues to promote exchanges of experts and disseminate good fiscalmanagement practices in the Russian regions.

15. The Project's incremental operating costs would be financed 100% from theproceeds of the Bank loan. The MOF and regional governments would provide in-kindcontributions toward the FMD's costs (e.g., rent, utilities, senior project management,and regional support teams). Upon expiration of the Bank loan, the core activities of theFMD will be fully funded from the Government's budget.

16. Assistance to Sub-National Governments in Accounting and Budgeting(US$10.1 million). Budgeting and fiscal management at the sub-national level in theRussian Federation, with some possible regional exceptions, has failed to keep pace withreforms at the federal level. The budget formulation process has not evolved from theprevious regime's practices. There is no modem treasury function for budget execution,ex-post audit is spotty, and there is no evaluation of budget policies. Another issue ofsignificant importance is the lack of transparency in the regional accounting recordswhich impairs the capacity of lenders and the federal government to make timely andadequate assessments of regional creditworthiness. The Government has initiated severalmajor efforts to improve the quality of financial reporting and budget management in the

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regions. However, these efforts have not yet spelled out in sufficient detail the changesneeded in financial management, accounting and reporting at the regional level.

17. To this end, the component will finance the provision of technical assistance to theParticipating Regions, in support of regional institutional development programs,consisting of: (i) diagnostic reviews and development of reform plans in the area ofbudgeting and fiscal management; (ii) financial planning, treasury and cash management;(iii) budgetary accounting, reporting and audit; (iv) expenditure and public sectorrestructuring; (v) debt management systems; (vi) regional budget procurement system;(vii) regional fiscal management guidelines, best practice standards, and regional andlocal public finance manual; (viii) computer equipment and design of software programs;and (ix) training of local staff needed for a successful installation and subsequentapplication of integrated financial management systems in the selected regions.

18. Sectoral Public Expenditure Reviews (US$2.4 million). Fiscal adjustment at thesub-national level is linked to the success of regional structural reforms. Current patternsof regional budget expenditures-including unsustainable subsidization-indicate thatstructural reforms in the regions have been slower than anticipated. The component willassist participating regions with the design of expenditure reform plans by financing anumber of public expenditure reviews. These will primarily focus on the sectors whichhave been the largest recipients of subsidies from consolidated regional budgets such ashousing and utilities, agriculture, public transportation, education and health. The reviewsare expected to result in prioritization of budget expenditures into key functional sectors,identification of expenditure programs and projects with lower priority, introduction ofappropriate pricing policies to provide for cost recovery, as well as identification ofsectoral expenditure programs for alternative provision by the private sector. Thecomponent is expected to generate substantial savings for regional budgets in the form ofreduced subsidies to the sectoral programs with low rates of return or/and of low publicpriority.

C. Summary of Project Analysis

19. Economic. Although the Project does not lend itself to standard cost-benefitanalysis, it should improve the efficiency of public expenditure management throughincreased transparency in financial reporting, increased efficiency in resource allocationand improved targeting of subsidies and benefits at the sub-national level.

20. Financial. It has been discussed and agreed with the Government that technicalassistance to the regions be provided out of the loan on a grant basis. No on-lending tothe regions is envisaged.

21. Fiscal impact The Project is expected to have a significant fiscal impact bypromoting efficiency in public expenditure through increased transparency in budgetplanning and reporting. The Project would also enable regions to reduce budget deficits,reduce subsidies for housing and municipal services, and improve targeting of socialassistance benefits.

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22. Technical. It is expected that the technical assistance program will require theservices of both international and local consultants in order to ensure access tointernational best practice, while at the same time ensuring timely access and properinterpretation of existing financial data. It is assumed that relatively limited investmentwill be required to develop or adapt software needed to implement new accounting andbudgeting processes.

23. Institutional. Executing agencies: The Project will be implemented by theFoundation for Enterprise Restructuring, which will be in charge of procurement anddisbursement activities. The FER staff are already experienced with Bank procedures.The conceptual guidance under the Project is to be provided by the FMD, which shallassist the GOR in designing, implementing and monitoring the inter-governmental fiscalreforms. The Inter-Ministerial Working Group for Fiscal Reform will guide the reformsand oversee the FMD's activities. The quality monitoring function will be carried out bythe Expert Council.

24. Social. Some expenditure reforms and, in particular, movement to cost recovery inthe area of housing and communal services may adversely impact low-income groups.Consideration will be given to improvement of targeting of assistance to the poorestgroups. The project will incorporate the lessons of economic and sector work alreadyundertaken in this area, including the experience of the SPIL.

25. Environmental assessment- For the purposes of environmental assessment, theProject falls into Category C.

D. Project Benefits

26. The principal project benefit will be the improved legal framework of sub-nationalpublic finance and inter-governmental fiscal relations and structural adjustment at thesub-national level. These would result from intensive project efforts to enhance theexisting legal framework of inter-governmental relations and improve institutionalcapacity of the federal government and the regions in fiscal and economic management.As a result of the Project, the Government is expected to retain enhanced capacity ingovernment institutions for analytic economic work and monitoring in the area of inter-governmental fiscal relations. A principal benefit of the Project in the long term will besounder fiscal and economic policies of the regions.

E. Project Risks

27. There is a risk that the current consensus in favor of inter-governmental fiscalreform might be lost and that the program might then stall. This risk is partially mitigatedby including representatives of the Duma and the Federation Council in the IMWG. Thereason that progress toward a more stable and transparent inter-governmental fiscalsystem is important for the success of this project is that without consistent and positiveincentives in support of regional fiscal reform, technical assistance might not lead to achange in behavior. The federal dimensions of the project, in particular, are designed tomitigate this risk.

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28. The possible weakening of political will to implement fiscal management reformsat the regional level poses another risk for the Project. This could happen as a result ofthe improved transparency of regional budgets and accounting procedures imposing hardbudgetary constraints on the regional administrations, thus making it difficult to resort tooff-budgetary funds or to accrue off-budgetary liabilities. Such a situation could triggerpolitical opposition to the Project at the sub-national level. Maintaining positive regionalperceptions of the benefits of inter-governmental fiscal reform can mitigate this risk byrewarding those who undertake agreed reforms.

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III. PROJECT COST, FINANCING, MANAGEMENT AND IMPLEMENTATION

A. Project Costs

29. The total project cost is estimated at US$36.2 million, including contingenciesamounting to US$2.0 million, taxes of US$4.7 million, and an up-front fee of US$0.3million. The Bank would finance US$30.0 million or approximately 83% of total projectcosts. The estimated project cost summaries are shown in Tables 3.1 and 3.2. All projectcosts are based on August 1999 prices. FMD and FER incremental staff costs wereestimated based upon current rates for local staff operating in the Foundation forEnterprise Restructuring (FER) in Moscow, adjusted for current labor market conditionsin Russia.

30. Project costs include technical assistance (consulting services), training, operatingexpenses of the Fiscal Monitoring Division and the PIU (Foundation for EnterpriseRestructuring), cost of goods, contingencies, and the commitment fee (1% of the loanamount):

• Technical Assistance (TA) (US$21.5 million). TA costs were derived from terms ofreference and recent fees quoted for comparable specialized services in Bank-financed projects in Russia. Both foreign and local consultants will be responsible forany tax liability incurred in the course of the Project. Most of the research andanalysis conducted by the FMD will be carried out with the assistance of localconsultants contracted on both short- and long-term bases. The estimated cost forlocal consultants is US$3,000 per person-month. Foreign TA will be needed to guideFMD staff and local consultants in internationally-recognized analytical techniques inselected policy areas. The estimated cost for foreign consultants is US$20,000 perperson-month.

* Operating Costs (US$6.8 million). The Bank would finance a part of the US$5.4million Fiscal Monitoring Division operating costs. Bank financing of the FMDwould amount to US$3.9 million. The Bank would also finance operating costs of theFoundation for Enterprise Restructuring in the amount of US$1.4 million.

* Goods (US$1.9 million). Unit costs were based on similar goods recently purchasedin Russia from local suppliers.

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Table 3.1Estimated Project Costs

(US$ equivalent)

Foreign Local Total Foreign as % of ComponentTotal Cost as % of

Total Cost

A. TECHNICAL ASSISTANCE

Project Component 1. Strengthening Federal Legislation

1.1. technical assistance 1,962,000 218,000 2,180,000 90% 6%

Project Component 2. Strengthening Federal Monitoring Capacity *

2.1. technical assistance 6,670,800 654,000 7,324,800 91% 20%

Project Component 3. Assistance to Sub-National Governments

3.1 technical assistance 5,668,000 2,180,000 7,848,000 72% 22%

Project Component 4. Sectoral Public Expenditure Reviews

4.1 technical assistance 0 2,180,000 2,180,000 0% 6%

Total Technical Assistance 14,300,800 5,232,000 19,532,800 73%

B. OPERATING EXPENSES

Fiscal Monitoring Division Operating Costs 0 5,446,300 5,446,300 0% 15%

PMU Operating Costs 0 1,389,500 1,389,500 0% 4%

Total Operating Expenses 0 6,835,800 6,835,800 0%

C. GOODS 1,800,000 480,000 2,280,000 79% 6%

D. PRICE CONTINGENCIES 1,430,080 1,501,320 2,931,400 49% 8%

E. VAT on SERVICES 3,146,176 1,151,040 4,297,216 73% 12%

F. FEE (1% of the Loan) 0 300,000 300,000 0% 1%

TOTAL PROJECT COST 20,677,056 15,500,160 36,177,216 57% 100%°

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Table 3.2Project Financing PlanUS$, including taxes

Foreign Local Total Foreign as% of Total

GOR 0 6,77,26 6T77,21 ()%

World Bank 16,100,800 10,667,8U0 26,768,600 60%

Contingencies 1,430,080 10320 2,931,400

Fee (1% of the Loan) - 0 30,lU0 o300,W 0%

Total 17,530,880 18,646,336 36,177,216 48%

% of Total 4/8% 52o 100%

B. The Borrower's Financial Contribution

31. Total Government financing would be US$6.2 million. This amount would becomprised of in-kind contributions toward the FMD's recurrent costs (see Table 3.3 fordetails), as well as 100% of any taxes/duties on goods and VAT on consultant services.Expenses eligible for financing under this arrangement would include: staff salaries, rent,travel, and utilities.

• US$1.5 million of the FMQ's operating expenses The FMD's operating costsamount to US$5.4 million, of which the Borrower would be responsible for coveringUS$1.5 million. The Borrower's portion would be comprised of in-kind contributionsspread over the life of the Project (see Tables 3.3 and 3.4).

* Taxes and duties levied on Goods (US$0.4 million). The Borrower would beresponsible for covering all taxes and duties levied on Goods.

* Taxes (VAT) on Consultant Services (US$4.3 million). The Borrower would beresponsible for covering all VAT charges levied on Consultant Services.

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Table 3.3Value of Government's In-Kind Contribution

(US$ equivalent)

per year over 5 years1. Central Office:

Staff 113T,52C 567,600Rent * 340,800 204,000'lravel 3,500Utilities 3,40C 17,0002. Regional Offices:

Staft 1T34,64C 673,200Rent 14,4() 72,00U()TOTAL 3U7,46C 1,537,300

Table 3.4Proposed Schedule of Government Staffing under the Project

(man months)

2000 2001 2002 2003 2004 Total

Regional Government ContributionRegional Support Teams 108 108 108 108 108 540

MOF Contribution to MoscowDDivision Head 12 12 12 12 12 60Deputy Division Head 12 12 12 12 12 60Consultants 12 24 36 48 48 168Chief Specialist 24 24 24 24 24 120Leading Specialist 12 24 24 24 24 108Sub-Total 72 96 108 120 120 516

Total Man-Months 180 204 216 228 228 1,056

C. Procurement

32. All Bank-financed goods and consultant services would be procured in accordancewith the Bank's Guidelines: Procurement Under IBRD Loans and IDA Credits (January1995, revised January and August 1996, September 1997, and January 1999) andGuidelines: Selection and Employment of Consultants by World Bank Borrowers(January 1997, revised September 1997 and January 1999), respectively. NationalShopping (NSH) procurement would require that original price quotations and receiptsfrom suppliers be kept on file for review/audit purposes during supervision missions. TheFER's Administrative Departnent would be responsible for tracking procurement actionsand approvals as well, as periodically reporting to the Bank on procurement progress.

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Two additional procurement staff will be hired to work in the PIU, including one SeniorProcurement Specialist, and one Associate Procurement Specialist. Also, staff will betrained through periodic training workshops conducted by the Bank.

* General Procurement- The majority of procurement actions under the proposedproject would be for consultant services. To ensure that the standard of consultantsprocured under the Project were of sufficiently high quality, the FER would submitfor the Bank's prior review terms of reference for all consultant contracts.Advertisements would be place in Development Business, and expressions of interestfrom firms sought for all ICB and consultant contracts. UJNDB publications will beupdated annually. Tables in Annex 2 list the applicable method of procurement foreach goods or consultant services package.

• Goods. An estimated US$1.9 million worth of goods would be procured, includingoffice supplies, furniture and equipment for the FER and FMD, and computers for theparticipating regions. All office supplies, furniture and equipment would bepurchased using the National Shopping (NSH) procurement method, grouped inpackages not to exceed US$50,000 (US$550,000 total). As such, none of thepackages would require prior Bank approval. To minimize the number of contractsand reduce the unit costs, computers for the regions would be purchased in packagesof about US$700,000 each (US$1.5 million total). These packages would be procuredusing the ICB method and require prior Bank approval.

* TechnicalAssistance/Consulting Services- Approximately US$21.5 million inconsultant services contracts would be procured to provide technical assistance in theform of specialists/advisers, studies, training programs, seminars and workshops.Tlhese items would be covered under four primary components (i.e., StrengtheningFederal Legislation; Strengthening Federal Monitoring Capacity; Assistance to Sub-National Governments in Regional Fiscal Reform; and Sectoral Public ExpenditureReviews).

* Operating Costs. These costs, in the amount of US$6.8 million, include incrementaloperating costs of the FER and FMD related to Project implementation and will bebased on annual budgets approved by the Bank. The staff will be employed inaccordance with Bank Consultant Guidelines and should be experienced, capable, andtheir terms and conditions of employment acceptable to the Bank and subject to priorreview.

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Table 3.5: Summary of Proposed Procurement Arrangements(US$ million equivalent)

Procurement Method TotalProject Element ICB NCB Other N.B.F. Cost

1. Works2. GoodsOffice Equipment, 1.8 0.5 2.3Computers, Printers (1.5) (0.4) (1.9)

3. Consultancies 25.8 25.8Technical Assistance (21.5) (21.5)

4. Incremental Operating Costs 6.8 6.8(5.3) (5.3)

5. Unallocated 1.0 1.0(1.0) (1.0)

6. Front-End Fee 0.3 0.3(0.3) (0.3)

Total 1.8 34.4 36.2Total Bank Financed (1.5) (28.5) (30.0)

Note: Figures in parenthesis are the respective amnounts to be financed by the Bank loan.

D. Disbursements

33. The loan is expected to be fully disbursed over 5 years, closing on December 31,2004. The Bank would finance: (i) 100% of expenditures for consultant services; (ii)100% of expenditures for training, seminars/workshops and study tours; (iii) 100% offoreign expenditures, 100% of local expenditures (ex-factory cost), and 80% of localexpenditures for other items procured locally; and (iv) 100% of recurrent costs of theFMD and FER (minus staff, rent, travel and utilities costs covered by the Borrower as in-kind contributions).

34. Special Account. To facilitate timely project implementation, the Borrower wouldestablish, maintain and operate, under conditions acceptable to the Bank, a SpecialAccount in US dollars in a commercial bank in Russia. It is envisaged that the FERwould perform the duties assigned to a PIU, including the procurement of consultantservices and disbursement of loan funds and coordination of project activities. TheSpecial Account would finance operation of the Foundation for Enterprise Restructuringand the FMD. In the initial phase of the Project, the balance for the Special Accountwould be limited to US$500,000. However, when the aggregate amount disbursed underthe loan reached US$3.0 million, the initial allocation would be increased up to theauthorized allocation of US$1.0 million by submitting the relevant Application forWithdrawal. Replenishment applications would be submitted at least every three months,and would include reconciled bank statements, as well as other appropriate supportingdocuments.

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35. Disbursements based on Statements of Expenditure (SOEs) would be used for: (i)consulting firms below US$100,000 equivalent (including studies and training); and (ii)conferences, workshops and seminars. Documentation supporting the SOEs would beretained by the FER and FMD and made available for review by the Bank supervisionmissions and auditors.

36. Accounts andAudits- The FER will maintain a single set of project accounts,including the account of the FMD and the Special Account. An audit of the accounts willbe performed annually in accordance with standards acceptable to the Bank. All projectsimplemented by the FER shall be audited as a single entity: the RFTAP will be includedamong these projects. Once the annual audit has been performed, it will be submitted tothe Bank by the FER within six months of the end of the Government's fiscal year. Forfurther details, see the Financial Capacity Assessment Report (Annex 6).

TABLE 3.6

Estimated Loan Disbursement ScheduleUS$ million

Bank Fiscal Year 2000 2001 2002 2003 2004 2005Semester Jan 00 - Jul 00- Jan 01 - Jul 01- Jan 02 - Jul 02 - Jan 03 - Jul 03 - Jan 04 - Jul 04 -

Jun 00 Dec 00 Jun 01 Dec 01 Jun 02 Dec 02 Jun 03 Dec 03 Jun 04 Dec 04Per Semester (%) 4% 4% 14% 15% 22% 24%/o 6% 5% 3% 3%Per Semester ($) 1.2 1.2 4.2 4.5 6.6 7.2 1.8 1.5 0.9 0.9Cumulative (%) 4% 8% 22% 37% 59%, 83%° 89% 940%/ 97% 1/0Cumulative (S)Cumulative (S) 1.2 2.4 6.61 11.1 17.71 24.9 26.7 28.2 29.1 30.0

Table 3.7Disbursements by Category

World Bank Financing

Category Amount (US$) Percentage of Expenditures to be Financed

1. Goods 1,900,000 100% of foreign expenditures, 100% of localexpenditures (ex-factory cost), and 80% of localexpenditures for other items procured locally

2. Consultants' Services 21,500,000 100%

3. Incremental Operating Costs 5,300,000 100%

4. Unallocated 1,000,000

5. Fee 300,000

1TOTAL 30,000,000

16

E. Project Implementation: Management Structure

37. Overall Project Management Structure The Government of the RussianFederation has created the Inter-Ministerial Working Group (IMWG) to represent itsinterests for the purposes of this project. It is the intention of the IMWG to build capacityin the Ministry of Finance (MOF) both to monitor regional fiscal performance and todesign and guide the implementation of policies and regulations in this sphere. TheIMWG has decided to implement the Project through a special unit based in the MOF,known as the Fiscal Monitoring Division (FMD), which shall provide substantiveleadership for this project and for the Government's relations with the World Bank onregional fiscal policy and to act as its secretariat. In order to assist with projectimplementation, the MOF has created a special division on monitoring of regionalfinance in its Department of Inter-Budgetary Relations. The Head of this division, who isalso the Deputy Department Head in the MOF, will act as the Project Director and Headof the FMD. The IMWG has also designated the Foundation for Enterprise Restructuringand Financial Institutions Development (FER) to assist project implementation withadministrative, procurement, accounting and other procedural support. A discussion ofthe key elements of the project management structure follows (see also ProjectOrganizational Chart).

38. The Inter-Ministerial Working Group. The IMWG is composed of representativesof key government agencies involved in designing and implementing inter-governmentalfiscal reforms such as the Ministry of Finance (MOF), Ministry of Regional Policy,Ministry of Economy, Apparatus of the President, the Working Center for EconomicReforms, and the Bureau of Economic Analysis, and has the decision-making powerscommensurate with the task of carrying out inter-governmental and regional fiscal reformin the Russian Federation. The IMWG establishment is part of the overall Governmentconcept of inter-budgetary relations reform. The First Deputy Chairman of theGovernment chairs the Group. The key functions of the IMWG are: (i) strategicmanagement of the Project; (ii) coordination of Project activities with other Governmentefforts in this area; (iii) approval of draft decrees and resolutions prepared under theProject and their submission to the Government; (iv) coordination of efforts betweenfederal and regional authorities; and (v) overall supervision of the FMD and FERperformance under the Project. In order to implement these functions, the IMWGapproves the annual work plans and budgets for the Project, approves the key Projectdocuments, approves the regions for participation in the Project, oversees the coreactivities of the FMD, approves the main TOR and consultant reports, approves theevaluation committees for the Project, and approves the Project Director.

39. Fiscal Monitoring Division. The main objective of the FMD is implementation andmonitoring of the reform of the inter-governmental fiscal relations at the national andregional level. Under the Project, the FMD would be responsible for the design of themonitoring system to be further supported by the MOF after the Project's completion. Itwill also be responsible for the supervision and coordination of Project activities on allcomponents. The FMD will act as a designated agent of the IMWG in carrying outProject activities.

17

40. The FMD's tasks and Project-related activities would be directly linked to theMOF's fiscal reform agenda, which would be ensured by the MOF's representation in theIMWG and contribution of MOF staff to the FMD. MOF would instruct regional financedepartments and the regional administrations to provide the FMD with fiscal datanecessary for its analytical work. The FMD would prepare annual budget estimates forproject-related activities (tasks) and submit them to the IMWG for approval.

41. The Head of the FMD (Project Director) is the head of the monitoring division ofthe MOF and has been appointed by the IMWG. The FMD staff consists of the staff ofthe monitoring division of the MOF, to be supplemented by consultants hired through theProject. The MOF will initially contribute 5 staff members to the FMD, with this numberto increase over the life of the project to 10 in the year 2004. After project completion theMOF is expected to be able to perform the monitoring functions of the FMD using onlythe staff of its monitoring division and the staff hired by the regions.

42. The staff of the FMD will report to the FMD Head on all substantive issues ofproject implementation. Hiring of all consultants for the FMD will be subject to WorldBank procurement rules for the selection of individuals. At least three (3) candidates willbe reviewed for each position. Once the appropriate candidate is identified, the FER willissue a contract to the selected individual. All contracts would be signed for no longerthan one (1) year and could be renewed upon the request of the FMD Head, subject tosatisfactory performance of the consultant.

43. The FMD staffing plan is as follows (see also FMD Organizational Chart):

The FMD Head is a public servant reporting to the IMWG. He has been appointed andreleased from his regular duties by the Minister of Finance, as approved by the IMWG.He is also the Head of the Monitoring Division of the MOF and therefore will have directauthority over the MOF staff in the FMD. The FMD Head will be in charge of allconceptual and analytical work within the Project, as well as building and maintaininggovernment fiscal monitoring capacity in the MOF and in the regions. In particular, theFMD Head will perform the following tasks:

• provide conceptual guidance and supervise all project related tasks;* design and manage the capacity within the FMD to perform the statistical analysis of

regional data;* create computer linkages with the Ministry of Finance and the regions, establish a

library and on-line databases on regional fiscal practices and the current legislationfor analytical work of the FMD itself, for the regional policy-makers, for investorsand for the general public;

* manage monitoring of regional compliance with federal laws and regulations as wellas with the RFRP regional conditionalities;

* provide analytical support and policy advice to the government on key issues of inter-governmental reform;

* organize publication and dissemination of Good Practice standards for regionalfinance managers.

18

The major part of the FMD staff would work under the Strengthening Federal Monitoringand Capacity Component that is the major part of the project. Two Senior Experts wouldassist the FMD Head in this work. The Senior Fiscal Analyst would coordinate the workof five (5) regional fiscal analysts financed from the loan and four (4) MOF-financedspecialists. The number of WB financed specialists would decrease to two (2) in the thirdyear of project implementation and to one (1) in the fourth year. This reduction would besubstituted by the increase of the MOF-financed specialists to five (5) in year two of theproject, seven (7) in year three, and eight (8) in year four, at which stage they should beable to work with the monitoring system designed under the Project without externalassistance. The major functions of the analytical group include:

organization of regional financial reviews in order to select the regions eligible forborrowing under the RFRP and other World Bank lending programs;establishment of the information system needed for the statistical analysis of regionaldata and computer linkages with the Ministry of Finance and the regions.

44. The Senior Expert on Coordination with the Regions would be responsible forall activities of the Project at the sub-national level. He/she would be assisted by theregional support teams (initially six (6) tearns with three (3) persons in each teamworking during the first three years of the project) and regional representatives (workingduring the last three years of the project in all regions). The major work of this groupwould be related to coordination of all project activities in the regions, including thepublic expenditure reviews and technical assistance to the regional governments. Inaddition, he/she will be responsible for:

* providing technical assistance to sub-national governments in budgeting and financialreporting, accounting, expenditure management, and debt management;

_ assisting the FMD in development of the database on regional fiscal practices and thecurrent legislation to meet the research needs of the FMD and the MOF;

* developing a Code of Good Practice for regional financial management as an extra-legal standard; and

* establishing relevant status and incentives/sanctions for compliance/non-compliancewith federal laws and regulations as well as with the RFRP regional conditionalities.

45. The work of consultants under the Monitoring Component would be supervised bythe FMD Head, assisted by the Senior Fiscal Analyst and the Senior Expert onCoordination with the Regions. They will be responsible for the preparation of the TORsand the tenders, initial selection of project contractors, evaluation of technical proposals,and approval of results of Consultants' work. The FMD Head would determine thedetailed division of work between the two Senior Specialists.

46. All other Component Managers (Senior Coordinators) will report to the FMDHead on substantive matters. They will be responsible for the preparation of TORs, initialselection of project contractors, evaluation of technical proposals, approval of results ofConsultants' work, and coordination with the World Bank, the IMWG, and the ExpertCouncil. All component managers would work till the end of the project, except for theSenior Coordinator of the Public Expenditure Review Component.

19

47. The Senior Coordinator of the Regional Technical Assistance Componentwould be assisted by one expert. They would provide technical and analytical support inthe implementation of this project component. The Senior Coordinator of theLegislative Component would supervise legal research, coordinate activities of the legalcomponent with developments under the World Bank Legal Reform Project, and organizequick policy/legal expert reviews and consultations upon request from the IWMG. TheLegal Expert would support him/her. The Senior Coordinator of the PublicExpenditure Reviews would manage the Public Expenditure Review Component of theProject. This specialist would organize the regional fiscal reviews to determine theoverall fiscal health of the regions and identify potential areas for improvements.

48. ProjectIImplementation Unit (PjU). The Non-Commercial Foundation forEnterprise Restructuring and Financial Institutions Development (FER) would beresponsible for compliance with all World Bank procedures, including the procurement,financial management, accounting, reporting and audits. The FER would provide similarsupport to the MOF in implementation of contracts under all project components. TheFER would report to the IMWG, which would assume the functions of the FER ProjectManagement committee (such committees are envisaged by the FER Charter for all itsprojects).

49. The Director General, supported by two Deputy Director Generals, leads the FER'smanagement team. The FER's functional organization is divided into two types ofbudgetary groups: general services and project groups. General services consist of thefollowing departments: management, secretariat, contract, finance and accounting.General services are responsible for procurement, disbursement, and financialmanagement and contract management. Costs of the general services departments areallocated to operating costs categories of all projects in proportion, reviewed and agreedby the PMC and approved by the Board. It is envisaged that approximately 15% of thegeneral services department costs would be allocated to the RFTAP project annually (thisis equivalent of approximately three full-time professionals and two full-time supportstaff).

50. The Contract Management Department handles all issues of procurement,contract monitoring and legal support. Staff of the Department consist of the following:Manager of the Procurement Department/Senior Legal Counsel, Senior ProcurementOfficer, Procurement Specialist/Legal Counsel and Assistant. The Manager of theDepartment reports to the Deputy Director. Due to the increased workload of the contractmanagement department related to new projects, it is expected that at least two (2)additional Procurement Specialists would be hired by the FER. Specific staff of theContract Management department would be appointed to be responsible for the RFTAPcontracts. They would be assisted, if necessary, by other staff of the ContractManagement Department.

51. The Finance Department is headed by the Director of Finance, supported by threestaff: a Disbursement Specialist, a Junior Disbursement Specialist, and a Specialist onSub-Loan Management. The Director of the Finance Department reports to the DeputyDirector General. Included within the responsibilities of the Finance Department are thepreparation of project financial management reports in conformity with Bank

20

requirements, as well as monthly reporting to the Ministry of Finance. Due to theincreased workload of the Contract Management Department related to the new projects,it is expected that at least one (1) additional Financial Analyst would be hired by theFER. A new integrated project accounting and reporting system would be developed bythe FER, in order to comply with LACI requirements. This system would significantlyreduce the workload of the finance department. Specific staff of the Finance Departmentwould be appointed to be responsible for RFTAP contracts. They would be assisted, ifnecessary, by other staff of the Finance Department.

52. The Accounting Department is headed by Chief Accountant, who is supported bytwo permanent Staff Accountants and one full-time Consultant. The Chief Accountantreports directly to the Director General. The Accounting Department is responsible forproducing financial statements in compliance with Russian law and InternationalAccounting Standards, as well as for ensuring compliance with current tax law. Due tothe introduction of the new project accounting system, no cost increases are envisaged inthe accounting department.

53. Expert Council (EC). The EC provides quality oversight of the FMD's work. Also,upon the Head of the FMD's request, it will review project outputs such as: terms ofreference, draft laws, regulations, and policy studies. Once a year it will prepare qualityreview reports and submit them to the IMWG and the Project Director. It will report tothe IMWG. In addition, the Expert Council would perform a general advisory role insupport of IWMG and FMD operations and Project implementation functions.

54. The Expert Council would consist of three members-one (1) international expert,and two (2) Russian experts. In the absence of FMD Head, the EC's clearance will berequired for any Project deliverable to be presented to the FER for payment. EC memberswould be appointed to and released from their duties by the IMWG, as well as report tothe IMWG.

55. Procurement and Disbursement under the Project. The Project procurement anddisbursement process is illustrated in the following Organizational Charts. Contractorsfor specific Project-related tasks would be hired on a competitive basis only, includingindividual consultants to be hired by the FER in support of the FMD's operations. TheProject Tender Commission would be responsible for the final selection of contractors forall project tasks. The Tender Commission would include representatives from the keygovernment agencies involved in project implementation including: Ministry of Finance,Ministry of Economy, Ministry of Regional Policy, and the FER. To proceed with thefinal selection of contractors, the TOR for each project task would be prepared by theFMD on the basis of the annual Project work program. The annual work program wouldbe cleared by the IMWG and by the World Bank and would be consistent with the overallProject Implementation Plan specified in the loan documents, including the ProjectAppraisal Report.

56. Upon receiving a project deliverable for a specific Project task, a Line Manager ofa Project Component would perform its initial evaluation, and, if satisfied, would submitit for clearance to the FMD Head, or in his absence to the EC. The FMD would approvethe report and submit an invoice for payment by the FER. In certain cases. World Bank

21

"no objection" letters and clearances from the IMWG would be required as well. TheFER's Finance and Accounting Departnents will process the application in accordancewith internal review procedures, check the compliance of the invoice and the supportingdocuments with the Consultants' contract provisions and WB requirements and wouldthen make payment to the contractor. It is expected that if no major deficiencies areidentified in the invoice and supporting documents an FER internal review would beperformed and invoice submitted for payments within five (5) working days of receipt ofthe approved report from the FMD.

57. Production of TORs. This process is the same as the process of the ProjectsOutcomes Delivery, with one exception: the IMWG's clearance is required for TORsrelated to legal policy design in inter-govermmental reform.

22

Regional Fiscal Technical Assistance Project

Inter-Ministeial Working Group(FER Project Management Committee)

Exert Counci

FoundaEiGn for Enterprise Restructuanng Fiscal Monftoning Division

I I - -General Director FMD Head

Project DirectorDeputy Head of the MOF

Inter-Budgetary Relations Department

FER General Departments Staff Project Consultants FMD ConsuHtants MOF Monitoring Division Staff(Part-Time) (Firms) (see separate chart) GOR Financed

Reporting to FMD Reporting to FMD HeadHired by FER Hire by FER

Procurement Support

Accounting Support

Administrativeisuorati

23

Fiscal Monitoring DivisionOrganizational Chart

FMD Head i Expen CoundDepuTa Depadrnen( Head F l ahe MsOF (5Foreign Exped

(GOR Financed) lclEpd"

M lonitodngComponent Legisiiaive Cofponegd Technical Assistance Component Pubk ExpendiWreZ j i ~~~~~Revews Component

I ~~~~~~~~~~~~~~~Sr. Coordinator I St. Coordinator i CoordibatorFin~ (GOR anca Nc (B Finane) (IB Financed) i IFanc

Sr.1Exped on | St.Fiscal Ana" Coordinator ICoordinatorCoordinaion wW Regioins i B-financeo (WB Finan;ed) | WFinanced)

(IN Fi8nanced...

(AB Fmanceo (WoB Financeo | GRFiacd) , eB lianced)

24


ANNEXES

25

ANNEX 1

PERFORMANCE AND MONITORING INDICATORS

26

PERFORMANCE AND MONITORING INDICATORS

Project development objectives Goals Actions Indicators

Improved intergovernmental Stable, fair and predictable Strengthen federal monitoring capacity Computerized information network forfiscal relations system of intergovernmental fiscal monitoring in place

fiscal relations

Inventory expenditure assignments Inventories of expenditure assignmentsamong various levels of govemment completed

Clarify expenditure assigmnents among Laws and legal amendments onvarious levels of government expenditure assignments drafted

Phase out unfunded mandates Laws and legal amendments on unfundedmandates drafted

Improved fiscal performance at Modern accounting and Implement Treasury principles of budget Treasury principles of budget executionthe regional and municipal level budgeting execution implemented

Adopt a Code of Good Practice of Regional compliance with clauses ofregional fiscal management Code of Good Practice improved

Prepare model draft laws on reporting, Laws on reporting, budgeting and budgetbudgeting and budget management management drafted

Install computerized information network Computerized systems, in particularfor decision-making and reporting financial reporting, installedpurposes

Prepare model draft laws on capital and Model laws on capital and multi-yearmulti-year budgeting budgeting drafted

Prepare model draft laws on budget audits Model laws on budget audits drafted

Modern debt management Adopt a system for debt management Regional borrowing and debt servicingprofiles improved

Stable, fair and predictable Design formula-based equalization Formula-based equalization transferssystem of intra-governmental transfers designedfiscal relations

27

ANNEX 2

PROCUREMENT PLAN

28

1. Thresholds for Procurement Methods and Prior ReviewRussian Federation: Regional Fiscal Technical Assistance Project

~~~~~~~~~~~~S~~n1 r~rmn ~1w__ _ _ _ _ _ __; __ __

Category ICB NCB NSH Other Methods Percentage of loan amountsubject to prior review

1. Civil Works1. 1. Procurement Thresholds1.2. Prior Review2. Goods2.1 Procurement Thresholds: >US$200,000 >US$50,000

US$1 .8m US$0.5m 5%(US$1 .5m) (US$0.4m)

2.2. Prior Review All First two contracts

3. Consultant Services QCBS3.1. Aggregate Amounts US$25.8m

(US$21 .5m)3.2. Prior Review IC: All TOR and

standard contract; Firms'Contracts >US$t00,000: 95%

All TOR, short lists,RFP, ER and contracts.

Ex-Post Review Ex-post review will be required of Consultant contracts below the threshold, plus Goods purchased under NSH.

5. Brief statement: The Contracts Management Department of FER has at present four staff (3 Specialists and I Assistant) and is planning to recruit two more Procurement Specialists toincrease capacity. The new staff will not be assigned specifically to the new project, but will take their share of the overall workload in accordance with a clear distribution ofresponsibilities within the Department.6. Country Procurement Assessment Report 7. Will the bidding documents for the procurement actions of the first year be ready by negotiations? Yes

8. Est. date of Project Launch 9. Date of General Procurement Notice 10. Indicate if there is procurement 11. Domestic Preference for 12. Domestic Preference forWorkshop: Januasy 2000 publication: August 31, 1999 subject to mandatory SPN in Goods: Yes Consultant Services: No

IDevelopment Business: Yes Works: No13. Retroactive financing: No 14. Advanced Procurement: No15. Brief description of the Procurement Monitoring System and Information System: The Foundation for Enterprise Restructuring (FER) will maintain complete procurement files, whichwill be reviewed by the Bank's supervision missions. The Procurement Plan will be updated regularly. Procurement information will be recorded by the FER and submitted to the Bank aspart of the quarterly and annual progress reports. This information will include: revised cost estimates for the different contracts; revised timing of procurement actions, includingadvertising, bidding, contract award, status of contracts, and completion time for individual contracts; and compliance on specific methods of procurement. A Management InformationSystem (MIS), with a procurement module, will help the FER monitor all procurement information.

16. Name of Procurement Staff Member on the Project Team: Karl Skansing, Moscow RM Division: ECCRU Tel. 7-095-745-7000 (ext. 2073)17. Brief description of the role expected of the Field Office in Procurement: The Moscow RM will provide procurement review and back-up to the Project team.

29

2. Procurement ScheduleRussian Federation: Regional Fiscal Technical Assistance Project

<Lr'J2 4IA. CIVIL WORKS

B. GOODS1. Office Equipment/Supplies Goods 01-08/G NSH N/A N/A N/A N/A2. Computers/Printers - Regions 09-1 I/G ICB Jan-0I Apr-O Jul-0I Dec-03

C. SERVICES1. Strengthen Federal Legislation

1.01 Inter-governmental fiscal Consultant RF/CS/1.1 QCBS Feb-00 Apr-00 Nov-00 Jun-04relations, regional budgeting and debt1.02 Regional development fund " RF/CS/1.2 QCBS Feb-00 Mar-00 Jul-00 Apr-02

- ONNI.'A .

2. Strengthening Federal MonitoringCapacity

2.01 "Standard" monitoring system Consultant RF/CS/2.1 QCBS Jan-0 I Mar-O Oct-0 I Jun-042.02 "Extended" and "special" RF/CS/2.2 QCBS Mar-00 May-00 Dec-00 Jun-04monitoring ratings2.03 Fiscal statistic database " RF/CS/2.3 QCBS Feb-00 May-00 Nov-00 Apr-03development

3. Assistance to Sub-NationalGovernments

3.01 Financial planning, treasury and Consultant RF/CS/3.1 QCBS Mar-00 May-00 Dec-00 Sep-03cash management3.02 Budgetary accounting, reporting " RF/CS/3.2 QCBS Mar-00 May-00 Dec-00 Sep-03and audit3.03 Expenditure and public sector " RF/CS/3.3 QCBS Oct-OO Dec-00 Jul-0I Feb-04restructuring3.04 Debt management system " RF/CS/3.4 QCBS Oct-OO Dec-00 Jul-0I Feb-043.05 Regional budget procurement " RF/CS/3.5 QCBS Oct-00 Nov-00 May-01 Feb-04system3.06 Regional fiscal management " RF/CS/3.6 QCBS Nov-01 Jan-02 Jul-02 Aug-04guidelines and best practice standards,develop regional and local publicfinance manual

30

4. Sectoral Public ExpenditureReviews

4.01 Housing/Utilities Consultant RF.ICS/4.1 QCBS Nov-99 Dec-99 May-00 Oct-004.02 Education RF/CS/4.2 QCBS Nov-99 Dec-99 May-00 Oct-004.03 Health RF/CS/4.3 QCBS Nov-99 Dec-99 May-00 Oct-004.04 Social Protection RF/CS/4.4 QCBS Nov-00 Dec-00 Apr-01 Oct-014.05 Culture and Recreation RFICSI4.5 QCBS Nov-00 Dec-00 Apr-01 Oct-014.06 Public Transportation RF/CS/4.6 QCBS Nov-00 Dec-00 Apr-01I Oct-0 14.07 Industry, Construction and RF/CSI4.7 QCBS Dec-00 Jan-01 May-01 Oct-01Agriculture4.08 Law Enforcement RF/CS/4.8 QCBS Dec-00 Jan-01I May-01 Oct-014.09 Regional/Local Governance RF/CSI4.9 QCBS Dec-00 Jan-01 May-01 Oct-01

5. Project Management

A. Operating Expenses FERi. Staffii. Consultants ICiii. Fixed Assets Goods NSHiv. Rentv. Communicationsvi. Property Insurancevii. Operational Expensesviii. Travelix. Staff Trainingx. Conferences/Seminarsxi. Project Audit

B. Incremental Operating ExpensesFMDi. Staffii. Consultants ICiii. Traveliv. Fixed Assets Goods NSHv. Operational Expensesvi. Communications (tel/fax/post)vii. Miscellaneousviii. Staff Trainingix. Conferences/Sem inars _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

31

Goods G 11Int'l Competitive Bidding ICB 3National Shopping NSH 8

Consultant Services CS 20Quality and Cost Based Selection QCBS 20

TOTAL 31

32

ANNEX 3

TERMS OF REFERENCE

33

RUSSIAN FEDERATION - REGIONAL FISCAL TA PROJECT

TERMS OF REFERENCE

About the Project:

The Project seeks to contribute to the reform of Russian sub-national government financeacross a broad front, both geographically (six regions) and functionally (all aspects of sub-national fiscal management). It is both amnbitious and complex, and involves a significantnumber of separate but interdependent components of technical assistance, which must workeffectively together if the Project is to achieve its goals efficiently and on time.

The Project consists of four major components of external TA, each of which will beprocured as a whole, but consists of a number of sub-components. The major components are;

1. Strengthening Federal Legislation on Intergovernmental Fiscal Relations and Sub-national Public Finance

2. Strengthening Federal Monitoring Capacity and Development of Standards forRegional Finance Management

3. Assistance to Sub-National Governments in Accounting and Budgeting4. Sectoral Public Expenditure Reviews.

It is essential that work on each of these components takes full account of (and whererelevant also contributes to) work that is being done on the other components. The Project coversground that also is being or has been examined by other Russian- or donor-financed work("Associated Projects"). It is important that due account is taken of this work, and that it isincorporated where appropriate as inputs into this Project.

Project Management: Fiscal Monitoring Division ("FMD") and Foundation forEnterprise Restructuring:

Project implementation will formally be handled by the Foundation for EnterpriseRestructuring (FER), but day-to-day management will be provided by the Fiscal MonitoringDivision (FMD) of the Ministry of Finance, which is intended to become the focal point formanagement standards in Russian regional finance, and the central repository for all informationabout regional finances.

FMD will also have an advisory role in recommending legal and extra-legal standards forall aspects of regional government finance in Russia, including advice to the Inter-MinisterialWorking Group (IMWG) on improving all aspects of budgeting, accounting, and the preparationof financial reports for electors/tax-payers, central government, management, suppliers andcreditors; and the setting of standards for financial management generally in regionalgovermment. FMD will advise the IMWG on the desired content and structure of legislation andregulation, (iricluding "extra-legal" instruments such as a code of Good Practice with complianceencouraged by incentives, as opposed to legal requirements where non-compliance is penalizedby legal sanctions).

34

More specifically, FM:D will perform the following functions:

* developing and specifying the regulatory standards for monitoring regional finance;* establishing the tools for monitoring regional finance;* specification of monitoring needs for each of the identified future functions* monitor compliance with federal requirements, for purposes of authorizing federal

Budget Transfers;* developing research- and databank.

The FMD is therefore responsible (under IMWG and MinFin authority) for the directionand integration of the various parts of the Project within the Terms of Reference, and for usingits discretion to ensure that TA resources are used as efficiently as possible to cover the areas ofgreatest incremental need, including organisation of routine exchange of information between thecontributors to the TA, and by running a "steering committee" for the Project. Providers of TAwill be expected to contribute to this forum, and to receive direction from it, within their terms ofreference.

Concept Paper:

A paper entitled "Concepts of Intergovernmental Fiscal Reform in the Russian Federation,1999 - 2001", prepared by the Government of the Russian Federation in 1998, defines theobjectives, particularly in respect of intergovernmental issues. The FMD will be available to helpprovide updates and interpret priorities in the implementation of this paper.

Inventory, Associated Projects:

An Inventory of Associated Projects, covering other TA work on topics similar to thoseunder the Project, will be provided to prospective bidders for TA work hereunder. (A draft isattached as Schedule xxxx) No assurance is given that this Inventory is yet complete, and noguarantee is given as to the quality of the output from the activities listed in this Inventory.

The Associated Projects are those where the subject matter overlaps particularly closelywith the goals of this Project, where the quality of the work is regarded as good, and which inmany cases formed known antecedents of the Project. Of particular importance will be a series ofdiagnostic studies and reform plans to be undertaken with IBRD loan funding in parallel withthis Project, in the six subjects participating in this Project - but Associated Projects are in nosense limited to these studies. Attention should therefore be given to the output of all AssociatedProjects, and active working dialogue be established wherever possible.

Wherever possible, output material from the Associated Projects will be made available viathe FMD to those working on TA components of this Project - this material will eventually formone core component of a library to be developed by FMD in the course of this Project.

Conversely, it is expected that all other suitable source material created or located by thoseworking on the components of this Project, that is not yet in the Inventory, will be passed on forinclusion in the Inventory and in the library, and to that extent be in the public domain.

35

Timetable demands:

Many of the tasks described in the TOR will be more efficiently and more effectivelyexecuted if proper communication is established with relevant other components in this Project,or from Associated Projects. A strengthened and more consistent legal environment requiresestablishment of what the law is intended to achieve, and what contradictions exist in currentlegislation. Regional reform plans will be more satisfactory if they correctly understand thedirection of forthcoming legal and regulatory change - while legal and regulatory change will bemore successful if it responds to actual circumstances in the regions. If time and cost were noobject, then each task could be discrete, with its precedent needs dependent only on its ownresearch. In reality, outputs from the Project are required urgently, and much of the precedentneed is already largely or partially satisfied by Associated Projects. Other precedent needs ofsome components are a direct topic for other components.

Those invited to contribute TA under this Project will be required to inform themselves asclosely as possible about the output of the Associated Projects and other relevant components ofthis Project, to evaluate it and wherever possible to incorporate it in early provisionalrecommendations, that will allow dependent activities to move ahead. In due course, providers ofTA will be expected to verify or correct the implied assumptions about the validity of thisprecedent work, and where necessary to issue amended recommendations.

Many of the components of this Project therefore call for Provisional Outputs, based onwork assimilated from elsewhere (Associated Projects, or other components of this Project), toallow dependent work to get started on a timely basis; and later Definitive Outputs, involving theverification (or amendment) of the provisional conclusions, and the generation of the definitiveoutputs.

The FMD, in its project management capacity, will assist in the flow of this inter-task andAssociated Project information.

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PROJECT COMPONENT 1

STRENGTHENING OF FEDERAL LEGISLATION ON INTERGOVERNMENTAL FISCALRELATIONS AND SUB-NATIONAL PUBLIC FINANCE

1. Background

The Russian Federation has undergone significant reforms in its system ofintergovernmental fiscal relations over the past six years. The Budget Code, approved by theDuma, and Part I of the Tax Code that became effective in January 1999, address many aspectsof two of the four pillars of any system of intergovernmental fiscal relations: fiscal managementand budgeting, and revenue and tax assignments, respectively. The two other pillars of a systemof intergovernmental fiscal relations, expenditure assignments and the system of transfers willneed to be addressed in separate legislation.

Lack of clarity in expenditure assignments between the federal, regional, and localgovernments continues to be a vexing problem in the system of intergovernmental fiscalrelations in the Russian Federation. The issue of expenditure assignments is addressed in theBudget Code but without sufficient detail and clarity. Lack of clarity in expenditure assignmentsand the extensive use of unfunded expenditure mandates from upper-level governments threatento result in inefficient expenditure patterns and fiscally irresponsible behavior.

The Government introduced a formula-driven system of equalization transfers in 1994, theFederal Fund for Assistance to the Regions (FFSR). This system was changed every year sinceits introduction and it was practically abandoned in the formulation of the 1998 budget. Allparties involved, the Government, the regions and the Duma were dissatisfied with theperformance of the FFSR. The Government will be using a new but temporary formula for the1999 budget. The Government has announced its intention of overhauling the system of transfersfor future years starting with the budget for 2000.

Much of the reform process over the past six years has focused on the fiscal relationsbetween the federal and regional govermments. Less attention has been given to intra-oblastintergovernmental fiscal relation issues. The general budgetary principle has been that theregional governments had the freedom to organize their system of intra-regional fiscal relationsin any way they saw fit. Although some regions have moved to reform their budgetaryrelationships with local governments in a more stable and transparent fashion, the majority of theregional governments are still using a budgetary approach based on negotiation and bargaining,the benchmark that characterized the budget system prior to 1992. In 1997, the Law on theFinancial Foundations of Local Self-Governments mandated to the regions the introduction ofreforms such as minimum sharing rates for tax revenues with local governments and the use offormula-based transfers. But these provisions contain only general principles and concreteapplications still await development. Most regional governments appear to have delayed theintroduction of formula-based transfers because of a lack of understanding on how to proceed.

Over the past several years the budgetary process and fiscal management at the federallevel have been subject to significant changes and improvements in the Russian Federation. Amodem budget classification system based on the IMF's Government Finance Statistics has been

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introduced, a Treasury function for budget execution is near completion, and ex-post audit isperformed by the Chamber of Accounts.

However, budgeting and fiscal management at the sub-national level in the RussianFederation, with some possible regional exceptions, has failed to keep pace with the reforms atthe federal level. The budget formulation process basically has not evolved from the previousregime's practices, there is no modem treasury function for budget execution, ex-post audit isspotty and there is no evaluation of budget policies. While the newly approved Budget Codeattempts to address some of these deficiencies at the sub-national level, it does not address insufficient detail the necessary reforms in financial management, accounting and reporting at theregional and local level. There appears to be a consensus that a sub-national government budgetcode will be necessary to deal appropriately with all outstanding issues.

In most subjects, intra-regional budgetary relations are still characterized by expenditureassignments between the regional and local governments that lack clarity and stability. Inaddition, the problem of unfunded expenditure mandates from the regional authorities to localgovernments continues to be a source of friction and inefficiency in the use of scarce budgetaryfunds. Finally, in most subjects revenue assignments still lack transparency and predictability,thus detracting from the ability of local governments to plan ahead and destroying any incentiveslocal governments may have to mobilize their own revenues. Fundamental reform of intra-subject intergovernmental fiscal relations faces the handicap of lack of incentive for regionalgovernments to reform. Regional governments tend to feel quite comfortable with the currentnegotiated system because it provides them with discretion and flexibility.

An issue of significant importance is the exercise of fiscal responsibility by sub-nationalgovernments in the area of borrowing. While the new Budget Code will restrict and imposelimits on the ability to issue bonds and use other forms of borrowing by sub-nationalgovernments, and these should be further developed in a sub-national budget code, there is atpresent no adequate reporting system and mechanism for enforcement of sub-national borrowinglimits by the federal authorities. Some time in the future this control may be exercised by thecapital markets themselves but at the present time direct control by the federal authorities isnecessary. Lack of enforcement of borrowing limits is likely to be destabilizing at the nationallevel, compromising macroeconomic stability.

It should be clearly understood that ex-ante controls by the Ministry of Finance or anyother federal authority of borrowing by sub-national governments will be unnecessarilyrestrictive and bureaucratic. The limits on sub-national borrowing in the Budget Code are of aregulatory ex-post nature, and they do not grant any powers to the Ministry of Finance toapprove ex-ante borrowing by sub-national governments. What still needs to be addressed is howthe federal authorities will ensure ex-post that sub-national governments do respect theborrowing limits introduced in the Budget Code and what means or powers need to be granted tothe federal authorities. The development of adequate disclosure rules for the fiscal health of sub-national govermments should contribute to the foundations for the creation, in the future, of aself-policing system for sub-national borrowing within the capital markets themselves. This willbe the most effective and efficient way to impose fiscal discipline among sub-nationalgovernments. The sub-national budget code will need to address loan default and bankruptcyproceedings for sub-national governments.

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There is one last aspect of the overall legal framework governing the system ofintergovernmental fiscal relations which requires attention. Over the past six years many lawshave been passed on budgeting and financial management, revenue sharing, transfers, andassignment of functional responsibilities. In addition, there has been considerable variation in thedegree of enforcement of these laws. In some cases, the laws have not been much more thanproclamations with practically no implementation. As a consequence, inconsistencies andcontradictions among several of these laws are quite common. The most recent example isprovided by the contradictions between the Budget Code and the Law on the FinancialFoundations of Local Self-Government concerning the budgetary relationships between regionaland local governments. A systematic study of all current legislation on intergovernmentalrelations pointing out inconsistencies and contradictions is needed to get rid of this significantsource of confusion in the system.

2. Objectives

This project component has the following objectives:

0 Assisting the Government with a systematic review of all current legislation onintergovernmental fiscal relations with the goal of eliminating contradictions andinconsistencies.

0 Assisting the Government in documenting and analyzing the current assignment ofexpenditure responsibilities between the federal, regional, and local governments,which would help the Government in the drafting of the Law on the Assignment ofFunctional Responsibilities.

> Assisting the Government in development of legislation and regulation on revenuesharing and tax responsibilities of regional and local authorities.

> Assisting the Government in the analysis of different options for reforming the currentsystem of transfers, which the Government would use as a basis for drafting of thelegislation on Intergovernmental Transfers.

> Preparing recommendations for the Government on federal regulations for monitoringthe fiscal performance, budgeting, accounting and fiscal management at regional andlocal level.

> Assisting the Government and participating regions in the design of model legislationand recommendations on intra-regional fiscal relations, including prototype formula-based equalization transfers, expenditure assignments between the regional and localgovernments, in the design of stable and transparent revenue sharing between theregional and local governments, and with training in the implementation of these newsystems.

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3. Outputs and Indicators

A. Intergovernmental Fiscal Relations

The consultants will be required to research, analyse, and report and recommend on allaspects of intergovernmental fiscal relations, both at the federal/subject interface, and intra-regionally. Inputs in this context will include a close understanding of the Concept Paper, a fullknowledge of the extensive Associated Project work, review of the material generated by theregional diagnostic reviews in component 3, and further research as necessary.

Outputs will be required to cover:

• the consistency and effectiveness of the legal framework for intergovernmental fiscalrelations in Russia;

* the assignment of revenue streams and taxing rights, and of spending responsibilities,and any required changes in legislation to achieve the recommendations;

* a mechanism for intergovernmental transfers that achieves Concept Paper goals;model legislation and federal regulation for inter-governmental and intra-regional fiscalrelations.

Provisional outputs (for discussion with FMD) will be required within 6 months ofinception, to support particularly the development of Regional Reform Plans being generated byAssociated Projects, and the other part of this Component 1, dealing with strengthening andrendering more consistentt the legal and regulatory framework generally.

Definitive outputs, providing firm conclusions on each of the required issues, will berequired on timetable to fit the completion of the Project, and all the dependent tasks within it,before June 2004.

The principal indicators of success within this sub-component will be the extent to whichthe provisional and definitive outputs on the designated topics are available in time to allowother project components to move forward on schedule, and the extent to which therecommendations are proved to be workable in practice, both in implementation of the regionalreform plans (component 3), and in the development of a consistent and accepted legal andregulatory framework (the other sub-component of this component 1).

B. Legal and Regulatory Reform

This sub-component will cover all aspects of law and regulation governing Russian sub-national public finance. The subject matter will include particularly the legal and regulatoryprocess and the instruments thereof, including laws, regulations, and extra-legal instruments(such as the proposed Code of Good Practice). Consultants will be required to identify andrecommend steps for rectifying instances of contradiction, or gaps, in existing law andregulation, and to address areas where the existing law and regulation is not effective inpromoting the government's objectives and policies, including deficiencies identified elsewherein this Project.

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There will therefore be substantial inter-dependence between this sub-component and othertasks addressing the content and objectives of law and regulation. These include theintergovernmental fiscal relations work (the other part of this component 1), and the functionalreviews under component 3. There is substantial existing output from Associated Projects, thatwill be available from the Inventory, both covering aspects of the objectives of law andregulation, and identifying areas of deficiency or opportunity in the legal/regulatory structure.

The topics to be addressed in this sub-component, from such a legal/regulatory perspective,include:

* Constitutional and regulatory mandates, including boundaries and limitations to thelegal and regulatory process, and the basis and scope for incentive-backed "extra-legal"instruments such as the code of Good Practice.

* Definition of revenue rights and expenditure responsibilities (close ties tointergovernmental sub-component)

* All aspects of budget preparation and execution; provision for multi-year commitmentsin capital budgets and debt service (close ties to relevant parts of component 3)

* Accounting, disclosure, and the establishment of accountability (close ties to relevantparts of component 3)

* Debt, debt limitations, and bankruptcy procedures and remedies (close ties to relevantparts of component 3)

Provisional outputs will be required within 6 months of inception, and themselves dependsignificantly on input from the inter-governmental work under sub-component 1, and thefunctional reviews from component 3, as well as study of the Associated Projects. Theprovisional outputs will consist of identification of contradictions, gaps, and early-identifiedrequirements for reform. These will be required to inform the regional reform programmes, andas a basis for the FMD to make recommendations via IMWG to the Russian government forspecific reforms.

Definitive outputs will be required on an agreed timetable that may vary between topics,and be determined by the extent/quality of Associated Project material, and the needs forprogress elsewhere in the Project. These outputs will consist of conclusive recommendations oneach of the topics designated, to cover the direction, the manner, and the instrument of reform, toachieve purposes agreed by Russian govermment after consideration of the Provisional outputs.

The principal indicators of success in this sub-component will be the extent to which theprovisional and definitive outputs on the designated topics are available in time to allow otherproject components to move forward on schedule, and the extent to which the recommendationsare proved to be workable in practice, both in implementation of the regional reform plans(component 3), and in the adoption by the Russian government of the recommended reforms.

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PROJECT COMPONENT 2

STRENGTHENING OF FEDERAL MONITORING CAPACITY AND DEVELOPMENT OFSTANDARDS FOR REGIONAL FINANCIAL MANAGEMENT

1. Background

Among the weakest aspects of the system of intergovernmental fiscal relations in theRussian Federation is the lack of mechanisms for monitoring by the federal authorities of fiscalperformance by regional and local governments. At the present time, regional governments areunder the obligation to report the execution of the consolidated regional budgets (regionalgovernment budget plus the combined budgets of all local governments in the region). However,this reporting is insufficient to provide the necessary information on compliance with federalpolicies (such as cost recovery on public utilities), actual budgetary practices (such as theexistence and importance of extra-budgetary funds), or the level or extent of fiscal equalizationacross local governments.

The limited and aggregated nature of financial reporting by regional and local governmentsdoes not allow, at the present time, establishment of a clear picture of their fiscal health. Eventhough regional governments report consolidated budget data to the Ministry of Finance, thesedata reveal little information on the actual deficit position of sub-national governments on acommitment or accrual basis. For most cases, the budget data provides insufficient informationto evaluate the size, change and age of existing budgetary arrears. The budget data availableprovide no information either on the revenue costs to regional and local budgets of taxpreferences granted to enterprises, nor actual lending or loan guarantees by regional and localgovernments to enterprises. Nor has there been little consistent infornation on the level ofborrowing, debt service requirements, and composition of debt for regional and localgovernments. The transparency, and ultimately the validity, of sub-national budgets is alsocompromised by the lack of disclosure and information on extra-budgetary accounts and the useof non-cash payment methods.

The lack of quantitative information in regional and local reported budget accounts iscomplicated by the lack of information and uniformity on budgetary procedures and accountingsystems. There is little information on the constraints that are placed on the use of extra-budgetary accounts by agencies (and even by departments or divisions within administrations),and what the existing reporting requirements and safety checks are. There appears also to be awide array of practices across regional and local governments in budget planning arrangements,including revenue forecasting, current expenditures and capital investments. Very few regionaland local governments appear to have in place an appropriate treasury function with cash anddebt management and reporting of budget guarantees. A wide variety of approaches are used byregional governments to fund local govermnents. Non-transparent arrangemnents including non-repayable loans and mutual settlements appear to be quite common. In general, there is littleinformation about the degree of compliance by sub-national governments with federal normspertaining to the budget process and fiscal management and less information on actualbudgetary practices by sub-national governments in those areas where the law gives themdiscretion.

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2. Objectives

This project component has the following main objectives:

> To execute or commission research into fact and practice in local government financesin Russia. Much of the factual product of this research will be in the public domain,serving as a "library" of information on Russian regional finance. However, someanalytical conclusions may be closely held within government.

> To advise the Government, IMWG and the Ministry of Finance on improving allaspects of the legal and regulatory framework for regional govermment finances inRussia. This will include all aspects of budgeting, accounting and the preparation offinancial reports for electors/taxpayers, central government, management, suppliers andcreditors; intergovernmental fiscal relations both Federation/Subject, and Subject/City-Rayon including inter alia tax and expenditure assignments and inter- and intra-governmental fiscal transfers; and the setting of standards for financial managementgenerally in regional governments. FMD will both advise the IMWG on the desiredcontent and structure of legislation/regulation, and assist in coordinating the draftingand promulgation in a timely and consistent manner.

> To provide ongoing monitoring and supervision of all aspects of Russian regionalfinance within the revised regulatory framework on the basis of the data collectedthrough its research. FMD will make regular recommendations to the Government,IMWG and the Ministry of Finance on a wide variety of questions related to the fiscalreform in the regions.

3. Outputs and indicators

A. Standard Monitoring System

The Standard Monitoring System will respond to the Federal Government's need to maintain anup-to-date understanding of the fiscal and financial condition, and the state of compliance withfederal legislation and regulations, of each of the 89 Subjects of the Russian Federation.

Standard monitoring is envisaged as a computer based system, operating primarily on thebasis of objective, numerate, non-judgmental inputs fed through a structure that so far as possiblebuilds upon or adapts existing data sources, rather than creating entirely new structures.

The main tasks within this sub-component will be to:

Specify the indicators that should be tracked to achieve the purposes of StandardMonitoring; these are likely to include compliance with all the main provisions ofRussian sub-national public finance law and regulation, including particularly thesetting and execution of budgets within legal constraints, the level of debt, the level anddynamic of deficits, and the manner (cash or offsets) of budget execution.

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• Identify sources and flows of data that can be used for this purpose; and specify thedeficiencies in form, content, accuracy or verification status of this data, and whatneeds to be done to make it available in acceptable form.

• To specify and design the mechanisms for collecting and presenting this data routinely,in as near as practicable to real-time, including the computer and communicationsystems required.

* To specify the personnel and systems resources required to install this mechanism, andto assist the FMD in its implementation, including systems design, recruitment andtraining.

Associated projects and preliminary work suggest that substantial data resources and flowsalready exist, but that they are badly co-ordinated, and not used systematically to address issuesrelevant to the needs of Standard monitoring; moreover, current legal and regulatory structureshave meant that the information is often not in form and content as useful as would be desirable.

The development of monitoring needs will therefore require substantial dialogue with thedevelopment of accounting and reporting needs and with the development of legal and regulatorystructures. This dialogue forms part of the provisional output of each of the activitiesparticipating in it.

Provisional Outputs: specification of the form and content of input data required (to enablethe reform plans of participating regions to incorporate these regions as "pilots" for themonitoring process), and discussion with the relevant functional experts of any changes to theaccounting and disclosure requirements desirable to improve the disclosure and accuracy of keyvariables.

Definitive Outputs: specification, implementation and delivery to FMD, of a workingsystem to achieve the goals of Standard Monitoring.

Principal Indicators of success at the provisional stage will be the recognition ofmonitoring needs into the main functional reviews (particularly accounting, debt, and treasury);the inclusion of monitoring info-source requirements in the specifications for regulatory change;and the inclusion of Standard Monitoring data provision in the reforrn plans for the participatingregions as "pilots".

B. Extended and Special Monitoring System & Ratings

Extended Monitoring is intended to provide the mechanism by which the FederalGovernment can develop a closer understanding of financial and economic circumstances, andthe degree of reform attainment, in regions which are participating in the current Project, orwhich are seeking conditional credits or other discretionary benefits from the federalgovernment. Such regions will also be required to participate in Standard Monitoring - theExtended requirements are incremental, not substitutes.

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To the extent that such discretionary benefits are available as an inducement for desiredreforms, when penalty sanctions may not be available for constitutional reasons, ExtendedMonitoring will provide the main tool for determining where such discretion should be granted,and hence be a substantive instrument of policy. Extended monitoring may also serve asecondary purpose, in helping with the analysis of the effects of other grants and policy actionsundertaken e.g. in response to the intergovernmental fiscal analysis.

This sub-component addresses both the specification of the Extended Monitoringstandards, and the design and construction of mechanisms for tracking attainrments against thosestandards. As with Standard Monitoring, this will include:

* Specifying the indicators to be monitored.

* Specifying the data and information sources required to monitor them, and identifyingany enhancements required to render current sources of such data effective for thispurpose.

* Specifying and designing the mechanisms for collecting and analysing this data,including the computer and communication systems required, and the extent of localrepresentation.

* Specifying the personnel and systems resources required to implement therecommendations, and assisting FMD in the introduction of an effective Extendedmonitoring capacity within the Project's timetable.

The Extended Monitoring standards themselves are likely to be closely related to thestandards specified in the Code of Good Practice, but may also contain a number of otherquantitative (creditworthiness) or qualitative (governance) indicators designed to provide a closeunderstanding of compliance, and of commitment and attainment in the implementation ofreforms. The standards involved will be graduated and progressive to provide a measureattainment, and provide a basis for incentives, across a wide range of levels of attainment.

Tlhe evaluation based on these criteria is then likely to be used as a basis for an internal"rating" of sub-national governments, as well for specific discretionary credit decisions.

Substantial components of the Extended Monitoring requirements are likely to be availablefrom the provisional output of sub-component 3, from Associated project material, and from theIBRD's loan conditionalities. Equally, the provisional conclusions from this sub-component as towhat will be suitable components of Good Practice will be required as provisional input to theregional reform plans and the development of the extra-legal framework in Component 1. Givenits extra-legal character, it is desirable that the Good Practice Code is the subject of extensiveconsultation and explanation with the regions to which it will apply, and that so far as possible itscontents are accepted by and agreed with them. This work will interlock closely with the FMD'soverall co-ordinating role in the Project.

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Provisional outputs will therefore consist of contribution to the specification of thestandards of Good Practice, and the data flows, analytical resources, and all other facultiesnecessary for the continuing appraisal of reform implementation in the six initial participatingregions, and the definition of the resources required to deliver this appraisal on a continuingbasis, for an increasing number of regions.

Definitive Outputs Implementation of the appraisal structure, and its successful operation toproduce a means to monitor progress of the participating regions. Installation of the graduatedrating process, and its application to a widening cadre of regions. Publication of the Code ofGood Practice, and its development after debate into an accepted standard for reform orientedregions to aspire to.

The principal indicators of success in this sub-component will be the extent to which theprovisional and definitive outputs on the designated topics are available in time to allow otherproject components to move forward on schedule. The extent to which the Code of GoodPractice is really accepted by the participating regions - and by other investors, therebydeepening the incentive for its adoption by other regions - will be important, as will be theextent to which it provides a continuum of incentive across a range of attainments, rather than asingle-standard hurdle.

C. Fiscal Statistical Database

The FMD, in its co-ordinating role for regional finance generally, will operate a centralinformation resource non behalf of regions and all other interested parties. Much of thisinformation will be in the public domain; but some aspects of it may be designated as restrictedto certain categories of user, or for internal use only.The topics to be covered by this information resource should be available in paper or electronicform, and should be accessible through a website to be created for the purpose.The topics will include:

* Regional Budget statistics, developed from the Standard Monitoring data flow.

• Additional budget and economic statistics, developed from other data sources, to providegreater transparency for comparison between regions, and as a basis for externalinvestment decisions and government policy research.

* Definitive statements of Good Practice standards and the proposed public financedetailed application manual and background material on their introduction in practice(where, how, what tools).

* An Inventory of donor funded and other work in Russia (including training materials),that can serve both as a theoretical basis and as a practical "toolkit" for theimplementation of public finance reforms in the directions required.

The contents of this library will almost all be the product of other sub-components of thisProject, and hence dependent on that other work; the task of this sub-component will be theassembly and presentation of this material. Conversely, the product of this resource will be an

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important ingredient for the wider take-up of the reforms promoted by this Project. It isparticularly important that it is presented and publicised in such a way as to be seen by regions asa resource useful to them, rather than an imposition on them.

The tasks of this sub-component will be the detailed identification of content; theidentification of sources; the specification of the necessary communication and computerfacilities to collect, store and present the data; the specification of premises, personnel and otherlogistical resources required; and the implementation of these objectives within the life of theProject.

The Provisional outputs of this sub-component will include participation in thespecification of the data content and format required for monitoring, and in the identification anddissemination of suitable Associated Project material to allow other components to make rapidprogress towards their respective tasks.

The Definitive outputs will be the installation and operation of a mechanism for thecollection storage and delivery of the specified data categories.

The Indicators of success will include both the mechanical accomplishment of the requiredoutputs, to a timescale that facilitates the completion of other project components on time, andalso the acceptance of the resource by regions, investors, other parts of government, and thirdparties, as a definitive resource and a helpful contribution towards their own goals.

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PROJECT COMPONENT 3

ASSISTANCE TO SUBNATIONAL GOVERNMENTS IN ACCOUNTING AND BUDGETING

1. Background

Current Russian budget rules and accounting conventions are clearly at odds with thewestern "Best Practice" standards: rigid use of a cash (rather than accrual) convention; lack ofbalance sheets or reliable asset/liability ledgers; inconsistent consolidation of sub-districts and ofextra-budgetary funds; lack of proper distinction between operating and capital/financing itemsare among a few examples of major shortcomings. This has clouded management and publicunderstanding of many real issues resulting in a non-transparent setting of budgets and financialreports by regional governments.

Among many problems are already identified:

> The use of a "cash" convention which recognizes transactions only when settled incash. This has led to a systematic build-up of unsettled accounts payable (notrecognized as an expense until paid - hence a budget outcome may be "balanced"simply by not settling the bills; and an apparently balanced budget set on the basis ofnot expecting to settle the bills);

> Unclear and inconsistent consolidation rules which have confused the estimation bothof flows of revenues and expenses, and of aggregate liabilities of budget entities;

> Lack of reliable asset and liability records and of a balance sheet, which have preventedthe normal verification of flow entries through double-entry cross checks;

> Absence of accrual conventions which has left some confusion over the true cost forexample of zero coupon or foreign currency debt, or the consumption of Capital assets;and hence an inability to know the true cost of services delivered.

Budget formation and implementation has therefore been taking place against a backgroundof falling revenue, rising social need, and uncertainty. Major responses have included cutbacks tonear zero in infrastructure investment; a general decline in the level and standards of manyservices (apparently often with limited capacity to measure the effectiveness or efficiency ofservices that are provided), in deliberate delays in settlement of many purchase invoices forgoods and services; and in an increasing tendency to borrow.

In parallel with this component, a series of regional diagnostic reviews and reform plans isbeing undertaken in the six participating regions (also funded by IBRD loan finance). Ongoingclose dialogue is essential between the consultants undertaking these studies, and the consultantsworking on this component: recommendations on budget and accounting reform must bothrespond to the findings of the diagnostic reviews (and a number of other Associated Projectswith the same goals in other places), and provide direct guidance back to the reform plans.

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2. Objectives

This component has the following objectives:

A. To establish what is the current legal and regulatory environment covering regional andlocal budget formation and execution, fiscal management, accounting conventions,financial reporting requirements and standards for financial information.

B. To develop recommendations both on the proper objectives and the available means(both legal and extra-legal) of obtaining enhanced financial management and accountingstructures.

C. To assist with the installation in participating regions of mechanisms to deliver therequired level of budget management, public sector restructuring, accounting and financialreporting.

The end product is intended to be a mechanism for the formation, agreement,implementation, control, and reporting on budgets, that is both more effective in extractingservice from limited resources, and more responsive to the needs of the relevant stakeholders.

The relevant stakeholders for this purpose mean first and foremost the electors andtaxpayers of the region, acting where appropriate through their elected representatives; centralgovernment in its role as a counterpart to fiscal transfers and taxation flows, and as an alternativesupplier of services in some instances; and employees, suppliers and creditors who may have alegitimate right to understand to understand the working of a budget on which they aredepending for payment of their wages, for their goods and services, or for credit granted.

3. Outputs and indicators

A. Financial Planning, Treasury, & Cash Management

This sub-component addresses each of the functional tasks A B C above, for the captionedactivities. Of particular interest will be:

Financial Planning: Use of integrated multi-year plan process for budget formation; forexplanation/debate vis-a-vis legislators, taxpayers, etc; Revenue forecasting; future debtservice capacity (and use in current borrowing decisions - close link to debt tasks);sensitivity analysis (start of risk management) and scenario planning; use to manageexpectations towards realism, setting attainable budgets.

Treasury: Mechanism for controlling commitments and cash movements in budgetexecution; role in revenue collection; links between federal (local branch) and sub-nationaltreasury operations; use of software; tie-in to accounting and reporting process (generationof primary accounting data - close link to accounting tasks); tie in to process ofcreation/management of arrears and accounts payable; tie-in to process of cash and riskmanagement.

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Cash Management: Rules and procedures for the management of cash and liquid financialresources; investment in financial instruments; efficient use of cash, transmission, bankcredit risk issues; control of bank accounts.

B. Budgetary Accounting, Reporting & Audit

Budget: Rules and procedures for the form of budgets, and the procedures for establishing;federal laws, local laws; relationships between layers ; definition of the "boundaries" ofbudget/off-budget funds, budgetary undertakings, relationship between an administrationand its constituent departments; relationship between an administration and its downstreamadministrations located within its boundaries (cities, rayons).

Specification of mnain relationships between budget quantities: current vs. capital/financebudgets; balanced budgets, deficits, how deficits to be covered; accounting conventions tobe applied.

In all cases, with reference to recently introduced budget code and budget classificationlaws/regulations, and with the objective of retaining as much as possible of these newlaws/regulations as is consistent with the aspirations of Good Practice.

This task may result in proposals for a separate sub-national budget code and budgetclassification.

Accounting: Formal accounting vs. management information; accounting conventions (cashvs. accrual), chart of accounts; process for generating primary accounting data (links toTreasury); balance sheet, scope for reconcilement of flows to changes in balance of e.g.accounts payable, financial resources; rules regarding inclusion/exclusion of revenue,expense items, assets, liabilities in the accounts; consolidated vs. entity-only accounts; roleof accounting and management information in providing cost information for servicemanagement; basis of accountability of management.

Reporting: The extent to which information is made available to legitimately interestedconsumers; transparency; specification of frequency, content; accessibility to consumers.

Audit and Control: Independent verification of compliance with federal/local laws andregulations on budget and accounting information; separation of capacities; review ofcontrols, procedures; verification of entries and quantities; reporting lines of the auditprocess.

C. Expenditure & Public Sector Restructuring

In close conjunction with the sectoral reviews (components 4), examine/recommend on themeans and effectiveness of specifying and delivering services from budget resources. To includethe means of allocating budget resources, the means of measuring cost and success in deliveringservice, and of reallocating resources towards greatest needs. Level of cost recovery, subsidy;scope for reduced subsidy. Transparency of the process; consideration of capital resources aswell as current; potential for engagement of private capital, private management, or marketresource allocation techniques; impact of such actions on social needs indicators. Contribution to

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regional reform plans should include sectoral restructuring for at least two regions on eachsector, and at least three sectors for each region.

D. Debt management

Systematic identification of all obligations for which budget is liable; centralised oversight;monitoring of debt capacity (serviced from current revenues, vs. refinancing or asset sales);purposes for which debt incurred - investment, current spending, refinancing, etc; remedies,bankruptcy procedures; relationship to financial planning (future debt service capacity), and tocapital budgeting; obligations created on behalf of third parties (guarantees, etc); use of debt toengage in "commercial" activities; debt serviced by non-cash means - in-kind, or by tax offsets;debt limitations - volume/revenue flow, vs. service cost/revenue flow; creation of a debtregister (as ingredient of creating enforceable claim), to help police compliance with limitations;risks and risk management capacity.

E. Regional Budget Procurement System

Procedures governing commitment of budget resources; current supply, capitalinvestments; federal laws, local laws; separation of powers; procedures for follow-through toensure value received - immediate, subsequent follow up; stipulation, maintenance of adequaterecords of responsibility for procurement decisions.

This topic also includes the capital investment process in the form ofselection/procurement of capital assets - what process to establish capacity to finance, identifyand follow overall priorities, select investments on objective criteria, procure in disciplined way,implement and follow outcome in short and medium term, with feedback to policies and criteria.Relationship between debt and investment process; procedures for off-budget procurement wherepossible.

F. Regional Fiscal Management Guidelines, Best Practice Standards, Local Public FinanceManual

This task is essentially the drawing together of the specific functional analysis andrecommendations of the components 3 and 4 into a coherent set of recommendations both fortargets for broad standards (the Code of Good Practice), and detailed implementation (thedrafting of a Manual of Public Finance). Both tasks will have an iterative element, in ensuringthat the proposals are internally consistent between different project sub-components, that theyare consistent with federal government objectives (by closed liaison with FMD), and that theyare realistically attainable within the timeframe specified.

The provisional recommendations necessary to allow this activity to get started arethemselves likely to be based substantially on provisional outputs from component 3, and on theAssociated Projects. As the Project progresses, these provisional outputs will mature into moredefinitive outputs based on the refined inputs.

This task will therefore be continuously involved in the assembly and distribution ofprogressively maturing provisional output, and in two way feedback with the FMD, thoseinvolved in the tasks in this component 3, and other components of the Project. The creation of

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consistency between the constituents of Good Practice and the Extended Monitoringrequirements; the correspondence between the separate functional recommendations and therecommendations for legal reform; and the integration of sectoral reform recommendations intothe regional reform programs, will be specific tasks. The collection of the constituentrecommendations for Good Practice, and the corresponding detail in the Public Finance manual,will be a task of this sub-component.

For each of these sub-components, provisional outputs will include a substantialcontribution to the iterative process of developing the enhanced legal and regulatoryenvironment, and the reform plans for the regions. The definitive outputs will be the eventualspecification of the relevant components of Good Practice (in partnership with othercontributors), the preparation of the relevant sections of the detailed Public Finance Manual, andthe provision of tools and practical implementation techniques to assist in the attainment of thestandards specified.

The Indicators of success on each of these sub-components will be the extent to which theanalysis identifies real issues, and the consequent recommendations respond with proposals thatsuccessfully address these issues in a way that is attainable within practical resource constraints.An understanding by the regions of the reasons for and benefits of the recommendations will beessential. Progress on the regional reform programmes, the creation of the creation of an agreedCode of Good Practice, and the completion of the legal/regulatory reform process, will all beindicators of whether these goals have been achieved.

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PROJECT COMPONENT 4

SECTORAL PUBLIC EXPENDITURES REVIEWS

These reviews will take the form of a series of studies, one for each sector to be examined,to assist regional and local governments in the design of rationalisation strategies for the sectorconcerned, by costing alternative scenarios, and explaining strategy options for adjustments tothe levels of service capacity -and unit cost.

The reviews will incorporate analysis of the mechanisms for allocating both operating andinvestment budget resources between services, and between facilities for each service; fordetermining unit costs both ex ante (plan and resource decision) and expost(outcome andanalysis of effectiveness); measures for enhancing procurement effectiveness, and increasingbudget accountability; benchmarks and comparative performance indices for comparablefacilities, both within one region, and between regions.

The reviews must be based on reality, as discovered in the participating regions to bestudied, and not some remote ideal drawn from a different environment. The reviews must beconducted in tandem with the diagnostic reviews on regional finance, and each of the 9 sectoralreviews should study at least two of the 6 participating regions in detail; each of the 6participating regions should be the subject of at least 3 such reviews.

The reviews should incorporate wherever possible as provisional inputs the output fromAssociated Projects, and the work of the regional diagnostic studies as it relates to financialmanagement. As the Project progresses, there will be increasing output of management toolsfrom other parts of the Project, that can be incorporated into the sectoral reforms.

Each of the reviews should then provide as an output the sectoral reform part of theregional reform plan for the respective regions.

These sectoral reform plans will include recommendations as to:

* Alternatives to the "normative" method of defining required service levels* Methods of defining unit cost in the service provision, and of constructing models to

estimate the sensitivity of unit cost to a variety of scenarios on service volume and costrecovery

* Suggestions on alternative scenarios for reform of both service specification and servicedelivery, and the costs and other implications of each

* Estimation of the social and poverty-relief consequences of each of the scenariosproposed, including the indirect consequences through release or engagement ofresources otherwise required for other services.

* Implementation requirements for each, including specification of the required tools, andguidance on where/how to gain access to the requisite expertise and techniques.

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* Investment implications - how to cost, prioritise and finance; where possible, suggestmechanisms to provide for the engagement of private capital and other non-budgetresources, such as can facilitate sustained service delivery from increasingly scarcebudget fumding capacity.

These sectoral reviews will therefore generate provisional output in the formn of theircontribution to the draft regional reform plans, and to the expenditure management component ofthe functional reviews.

Progressive implementation of the regional reformn plans, and the development of thefunctional reviews, will allow these provisional recommendations to firm up into definitiveoutput recommendations during the life of the Project.

The indicators of success in these sectoral reviews will be the extent to which they cangenerate specific action plans that are accepted into the regional reform plans; and the extent towhich the action plans prove to be feasible in practice.

The sectors to be covered by such reviews are;

Housing, utilities:EducationHealthSocial ProtectionCulture & recreationPublic TransportationIndustry, Construction & AgricultureLaw enforcementRegional/local governance.

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ANNEX 4

SUPERVISION PLAN

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SUPERVISION PLAN

Approximate Activity Staffing Requirements Staff WeeksDates

January 2000 Project Launch: Task Team LeaderReview conditions Economist (Resident Mission) 1 (field)of effectiveness

April 2000 Supervision Mission Operational Analyst/Procurement Specialist 1Fiscal Finance Specialist 1Training Specialist 1

July 2000 Supervision Mission Task Team Leader 1Economist 1 (field)

October 2000 Supervision Mission Operational Analyst/Procurement Specialist IFiscal Finance Specialist 1Training Specialist 1Economist (Resident Mission) I (field)

_____________ Financial Management Specialist 2March 2001 Supervision Mission Task Team Leader 1

Economist 1 (field)September 2001 Supervision Mission Operational Analyst/Procurement Specialist 1

Fiscal Finance Specialist 1Training Specialist 1Economist (Resident Mission) I (field)Financial Management Specialist 2

March 2002 Supervision Mission Task Team Leader IEconomist 1 (field)

September 2002 Supervision Mission Operational Analyst/Procurement Specialist IFiscal Finance Specialist 1Training Specialist 1Economist (Resident Mission) 1 (field)

March 2003 Supervision Mission Task Team Leader 1Economist 1 (field)

September 2003 Supervision Mission Operational Analyst/Procurement Specialist 1Fiscal Finance Specialist 1Training Specialist IEconomist (Resident Mission) 1 (field)Financial Management Specialist 2

March 2004 Supervision Mission Task Team Leader 1Economist I (field)

September 2004 Supervision Task Team Leader 1Mission: Review Fiscal Finance Specialist 1overall Project Training Specialist 1progress Economist (Resident Mission) 1 (field)

Financial Management Specialist 2Note: Supervision plan for Regional Fiscal Technical Assistance Project is prepared based on average costs of supervision forECSPE projects for the Russian Federation for FY99.

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ANNEX 5

PROJECT IMPLEMENTATION PLAN

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PROJECT IMPLEMENTATION PLAN

PARTA. Strengthening of Federal and Regional Fiscal Legislation

1. Legal Review1.01 Inter-govemmental fiscal relations, regional budgeting and MinFin, FER Nov-00 Jun-04debt 01.02 Regional Development Fund MinFin, FER Jul-00 Apr-02

PARTB. Strengthening of Federal Monitoring Capacity

2. Developing and Specifying the Regulatory standards for Monitoring Regional Finance2.01 Development of "standard" monitoring system MinFin, FER Oct-01 Jun-042.02 Development of "extended" and "special" monitoring MinFin, FER Dec-00 Jun-04systems2.03 Development of fiscal statistical database MinFin, FER Nov-00 Apr-03

PART C. Assistance to Sub-National Governments in Accounting and Budgeting

3. Assistance to Sub-National Governments in Accounting and Budgeting3.01 Financial planning, treasury and cash management MinFin, FER Dec-00 Sep-033.02 Budgetary accounting, reporting and audits MinFin, FER Dec-00 Sep-033.03 Expenditure and public sector restructuring MinFin, FER Jul-01 Feb-043.04 Development of debt management system MinFin, FER Jul-01 Feb-043.05 Development of regional budget procurement system MinFin, FER May-01 Feb-043.06 Development of regional fiscal management guidelines MinFin, FER Jul-02 Aug-04and best practice standards; development of regional and localpublic finance manual

PARTD. Sectoral Public Expenditure Reviews

4. Diagnostic Sectoral Public Expenditure Reviews4.01 Detailed Public Expenditure Reviews for Housing and MinFin, FER May-00 Oct-00Utilities4.02 Detailed Public Expenditure Reviews for Education MinFin, FER May-00 Oct-0o4.03 Detailed Public Expenditure Reviews for Health MinFin, FER May-00 Oct-004.04 Detailed Public Expenditure Reviews for Social Protection MinFin, FER Apr-01 Oct-01Programs4.05 Detailed Public Expenditure Reviews for Culture and MinFin,. FER Apr-01 Oct-01Recreation4.06 Detailed Public Expenditure Reviews for Public MinFin, FER Apr-01 Oct-01Transportation4.07 Detailed Public Expenditure Reviews for Industry, MinFin, FER May-01 Oct-01Construction and Agriculture4.08 Detailed Public Expenditure Reviews for Law MinFin, FER May-01 Oct-01Enforcement4.05 Detailed Public Expenditure Reviews for Regional/Local MinFin, FER May-01 Oct-01Governance

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* All Individual Consultants will be procured in strict accordance with the Bank's Guidelines "Procurement andSelection of Consultants", with the added measure that each of the assignments will be advertised in both local andinternational journals to elicit the greatest response possible. From the expressions of interest received the SelectionCommittee will draw up a short list of no less than three candidates, and select from that list the most qualifiedindividual. These added measures will ensure the greatest degree of transparency and fairness in the procurementprocess.

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ANNEX 6

REPORT ON FINANCIAL MANAGEMENT SYSTEMS

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Reporton the

Assessment of Project for PMR-Based Disbursements*

Ineligible for PMR-Based Disbursements

Part I - Financial Management System:

I have reviewed the financial management system relating to this project. The objective of thereview was to determine whether the project has in place an adequate financial managementsystem as required by the Bank/IDA under OP/BP 10.02.

My review, which included visits to the project implementing agency, was based on the Bank'sguidelines for "Review of Financial Management System", and focused on the assessment of theproject's accounting system, internal control, planning, budgeting and financial reporting system,selection of an auditor as well as the format and contents of the Project Management Report(PMR) to be submitted by the borrower in support of Withdrawal Applications.

I confirm that the project satisfies the Bank's minimum financial management requirements.However, in my opinion, the project does not have in place an adequate project financialmanagement system that can provide, with reasonable assurance, accurate and timelyinformation on the status of the project (PMR) as required by the Bank/IDA for PMR-BasedDisbursements.

I have detailed in the attachment the inadequacies that I found in the system together with anagreed action plan by the borrower to remedy the situation.

Signed by:Financial Management Specialist(FMS-OPR)Andrew Mackie (LOAEL), November 20, 1999

Part II - Procurement/Contract Management System

I have reviewed the procurement/contract management system relating to this project. Theobjective of the review was to determine whether the procurement/contract management systemadopted by the project conforms to the Bank's guidelines for procurement in investment projects.

My review was based on the "Assessment of Agency's Capacity to Implement ProjectProcurement, Setting of Prior Review Thresholds and Procurement Supervision Plan" guidelinesissued by the Bank.

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I confirm that the project satisfies the Bank's minimum procurement management requirements.However, in my opinion, the project does not have in place an adequate procurement/contractmanagement system that can provide the appropriate data on major procurement and contractmanagement (PMR - Section 3) as required by the Bank/IDA.


Signed by:Senior Procurement SpecialistKarl Skansing (ECC 10), November 20, 1999

Part III: Physical Monitorable Indicators and Overall Assessment

I have reviewed the project's system for monitoring physical implementation progress, includingits monitorable indicators for major outputs. In my view, the system cannot provide theappropriate data on physical progress (PMR - Section 2) required by the Bank/IDA.


Also, based on the assessments of the FMS-OPR and PS, and/or considering my overallassessment of the project, I am of the view that this project is not suitable for PMR-baseddisbursements.

Signed by:Task Team LeaderEugene Gurenko (ECSIN), November 20, 1999

Part IV: LOA Reasonableness Review

I have conducted a reasonableness review of the process followed by the Task Team in assessingthe project, and I concur with its recommendation that this project is not eligible for PMR-BasedDisbursements.

Signed by:FMS-LOAJDOAndrew Mackie (LOAEL), November 20, 1999

* Signed original in project files.

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FINANCIAL MANAGEMENT CAPACITY ASSESSMENT

PART I - FOUNDATION FOR ENTERPRISE RESTRUCTURING

1. Summary and Key Findings

FER is a well organized PIU with a clearly defined organizational structure and qualifiedstaff Over the next twelve to eighteen months it is proposed that it will become projectimplementation unit for three- new IBRD loans with minimal increases in staffing with its corefinance functions. This is an ambitious aim which will only be achieved ifprocesses andinformation technology are integrated and automated. In the case of the Migration and ForestryProjects it faces significant capacity building issues within regional project implementationgroups. These are issues which are currently being addressed by FER management, but the Bankmust also be alert to these accountability issues in project preparation.

The Bank needs to adapt to the challenges posed by multi-project PIU's by providing greaterfocus particularly in the monitoring of operational budgets andfinancial management systemsand reporting.

2. General

The Foundation for Enterprise Restructuring and Financial Institutions Development (FER)is a non-commercial, non-profit foundation founded in July 1996. At the moment the foundersare Ministry of Finance (MinFin), Ministry of Economy, Ministry of Regional Policy, CentralBank of Russia, Ministry of Transport, Leontief Center and Foundation of Housing Reform,Gosstroy. FER is implementing agency for MinFin on three on-going Bank projects; FinancialInstitution Development, Enterprise Support, Enterprise Housing Divestiture and preparation ofMigration Project out of PDL preparation fund.

It is proposed that FER will also act as implementation agent for Sustainable Forestry Pilotproject, Regional Fiscal Technical Assistance project and Northern Out-Migration Pilot project.

2.1. Governance Structure.

Governance over the FER's activities is through the Board of Directors; a supervisory bodyconsisting of twelve members headed by two Co-Chairpersons (First Deputy Minister ofEconomy and Deputy Chairman of the Central Bank of Russia) with support of ExecutiveSecretary of the Board. Board meetings are conducted annually or more frequently as required.Minutes are kept for all meetings. The main functions of the Board are to approve:

* changes to the Charter* major restructuring of activities* the annual budget* changes to the organizational structure and staffing (salaries)* the annual report of FER including audited financial statements* the structure and composition of Project Management Committees (PMC's)

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The implementation of individual projects is governed by- the PMCs which are appointed bythe Board of Directors. This has around ten members representative of all key stakeholders.Committees meet regularly with frequency dependent on project activity. The functions of theCommittees are to:

* define project objectives and activities* approve project activities budgets and work plans* resolve project implementation issues* define sources of project finance* approve project participating entities, sub-borrowers etc.* form contract evaluation committees* approve Project Directors

The Project Director reports regularly to the PMCs on project implementation.

2.2. Regulations and Procedures.

The activities of FER are regulated by national laws and Bank rules and procedures. TheOperational manual of the FER provides clear definitions and instructions on the FERorganizational structure, functions of its management bodies, responsibilities of FERdepartments, job descriptions of staff, employment policy, budgeting and accounting procedures.Project implementation is separately addressing project description, project management system,financial procedures, implementation arrangements, reporting requirements and procurementprocedures.

2.3.Organizational Structure and Staffing.

FER's management team is led by the Director General, supported by two Deputy DirectorGenerals. FER's functional organization is divided into four budgetary groups:- general servicesand three project groups. General services consist of the following departments: management,secretariat, contract, finance and accounting. FER performs implementing functions for three on-going projects (FIDP, ESP and EHDP). The general services are responsible for procurement,disbursement, financial management and contract management. Costs of the general servicesdepartments are allocated to operating costs categories of all projects in proportion reviewed andagreed by the PMC and approved by the Board.

This requires no overall approval by the Bank although project operating budgets are agreedin advance by task team leaders. Project groups activities are staff which can be budgeted toproject specific issues.

The Contract management department handles all issues of procurement, contract monitoringand legal support. Staff of the Department consist of the following: Manager of the ProcurementDepartment/Senior Legal Counsel, Senior Procurement Officer, Procurement Specialist/legalcounsel and assistant. The manager of the Department reports to Deputy Director.

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The Finance department is headed by Director of Finance supported by three staff; adisbursement specialist and junior disbursement specialist and a specialist on sub-loanmanagement. The Director of Finance department reports to the Deputy Director General.Included within the responsibilities of the Finance Department are the preparation of projectfinancial management reports in conformity with Bank requirements and monthly reporting tothe Ministry of Finance.

The Accounting department is headed by Chief Accountant who supported by two permanentstaff accountants and one full time consultant. The Chief Accountant reports directly to theDirector General. The Accounting Department has responsibility for the production of entityfinancial statements compliant with Russian legislation and International Accounting Standardsas well as compliance with tax legislation.

Staffing policies are addressed in the Operating manual. The recruitment process istransparent and staff turnover is low due to pleasant working environment and goodcompensation scheme. Staff compensation packages include salary and medical insurance. Staffperformance reviews are performed annually. FER's Operating manual includes the provisionson compliance with "Norms of conduct and business ethics of the FER" for each employee.

Training opportunities exist for all levels of staff and are encouraged by management.Special training on accounting and financial management is financed by the FER. (The Chiefaccountant studies under ACCA program and Finance Director studies under MBA program).

3. Project Accounting Systems and Procedures

3.1. Accounting Systems and Reporting Requirements.

Current financial reporting is divided onto FER entity reporting which is handled by theaccounting department and project financial reporting which is conducted by the FinanceDepartrnent. The financial reporting system needs to be capable of producing several differenttypes of reports, including:

* Annual project management reports in accordance with Bank requirements* Quarterly Project Management Reports in conformity with Bank requirements* Annual FER financial statements prepared in accordance with IAS (maybe transformed from

Russian financial statements at the year end)* Annual FER financial statements prepared in accordance with Russian Legislation* Reports prepared at request of International Finance Organization Department of the

Ministry of Finance and Project Finance Center

Entity accounting is performed on Inotech accounting software package used byapproximately fifteen other World Bank projects in the Russia portfolio. Project financialreporting is prepared from withdrawal applications and summarized on an Excel Spreadsheet. In1998 the Bank required Foundation accounts prepared under International Accounting Standards(IAS) for the first time. At the time of preparing this assessment these financial statements werestill outstanding.

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There is a lack of interface between project and entity financial statements; a significantissue that exists across the Bank's entire Russia portfolio. As project financial statements are notpart of the double entry book-keeping system key internal controls such a overall cashreconciliation are not built into the system. These can be addressed by other sub-optimal internalcontrols, external audit reviews and Bank supervision but the medium term solution is to morefully integrate the two systems. The program for the integration of the two systems is planned tobe completed by December 31, 2000 at the latest. The precise details and extent of theintegration will be reviewed as part of the consultancy contract mentioned below.

In accordance with Bank's requirements FER has to prepare entity's financial statementsannually in accordance with IAS and Project Management Reports (PMR) quarterly.Management of FER recognize the importance of linking PMR's to technical analysis of ProjectManagers and this is being given particular attention in the preparation of the new projects.

In order to meet Bank's requirements the computerized accounting system of FER need tobe strengthened to provide higher level of automatization and internal control. FER is currentlyaddressing this issue through a consultancy contract with the following terms of reference:

* carry out a diagnostic on the status of bookkeeping in the Foundation in accordance withRussian accounting standards and IAS

• develop a procedure to maintain business accounting in FER using available softwareaccording to two standards simultaneously

• preparation of operational charts of accounts corresponding to local and internationalstandards

As well as the above the consultant will prepare recommendations and deliver training. Thesuccess of this initiative is extremely important in the overall success of the overall operationalstrategy of FER whose aim is to achieve significant efficiency gains in the face of a growth inactivity projected in the next twelve to eighteen months.

In addition to support of the consultant, the Bank agreed to review the overall format ofFER's entity financial reports and the project financial management reports. It is particularlyimportant to Bank supervision that there is a transparent link between entity budgeted and actualoperational costs and individual project component costs.

3.2. Budget preparation and execution

Budgets are prepared for all FER's activities including annual operating budgets. TheBoard of Directors is responsible for approving annual budgets and ratifies any changes. TheProject planning process in performed under guidance of Project Implementation Committees. Inaccordance with Bank's requirements actual data on project implementation is compared withthe budgets on regular basis. An issue for the Bank is how operational expense budgets withinthe Foundation are calculated and apportioned to individual projects. The overall annualoperating budget of FER will be submitted to the Bank's Country Unit for no-objection onemonth prior to submission to the Board of Directors. The Bank's Country Unit will also reviewcompliance through ex-post monitoring of the financial reports of the Foundation and projects.

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3.3. Internal Control Procedures

Internal Control Procedures of the FER are documented in Operational manual, and controlprocedures are also extensively defined under Russian legislation. FER management completedan Internal Control Questionnaire of the Bank. Procedures cover the following main areas of theproject implementation: budget preparation and execution, contract preparation and signing(procurement procedures), disbursement, assets management, etc. As noted above additionalprocedures are needed in order to ensure the appropriate control over the allocation of generalservices department costs to project operating cost categories. These will be incorporated intothe Operating Manual and are subject to the Bank's prior approval.

The management of all projects will be through one ruble project account in whichcounterpart funds and ruble denominated transaction from individual projects Special Accountsare held. If this approach is to be adopted it must be within an environment of sound integratedchart of account and internal control surrounding the reconciliation of the project account. Thisshould be explicitly addressed in the terms of reference of the consultant engaged in theintegration of accounting and financial systems. The Bank assessment team has addressed theseconcerns to the Foundation and if it were not for strength of the management and fmance teamwe would reject the approach in favor of separate ring fenced project account. Nevertheless wesupport the efforts being made in terms of the efficient project management and trust that, ifthere optimum system solutions can not be achieved then they will explore alternative andpossibly more expensive options requiring additional finance staff.

3.4 Audit Arrangements.

In accordance with Bank's requirements, audit of the project will be performed annually inaccordance with Standards acceptable to the Bank. Russian auditing company FBK audits eachyear all projects implemented by FER and Foundation as an entity. In order to ensure aconsistent approach to the financial management within the PIU we-recommend that theprinciple of a single auditor for all projects within FER be continued.

4. Conclusion

FER proposes to implement the new projects with minimal growth in central supportfunctions of finance and disbursement. This is to be achieved in part by the impending closure ofexisting projects. The plan is ambitious and is dependent on significant efficiency andrationalization of system software and internal control procedures. It also carries a significantrisk in project implementation as FER tenders for projects with MinFin with limited room for re-negotiation during implementation.

Two of the new projects have significant Regional Components (Forestry and Northern-Out Migration) and part of FER's responsibilities will include capacity building, training andcompliance with Bank reporting requirements. This is likely to be a significant and timeconsuming task to be managed with existing finance and accounting staff.

We have found the management of FER addressing these key issues and believe theirstrategy deserves support pending the outcome of the work by the consultants in theirrecommendations regarding the accounting systems of the Foundation.

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The other key finding is that the Bank needs to address the supervision of key elements ofthe supervision of multi-project PIU's on a more integrated basis in relation to the fiduciaryelements of financial management, review and approval of operational expenses and reviews ofproject and entity financial reporting.

PART I. REGIONAL FISCAL TECHNICAL ASSISTANCE PROJECT

1. Governance Structure

The Federal Government has created an Inter-ministerial Working Group (IMWG) torepresent their interests in the project. This group is composed of representatives of Ministry ofFinance, Ministry of Regional Policy, Ministry of Economy, Apparatus of the President, theWorking Center of Economic Reforms and the Foundation for Enterprise Restructuring. Tosupervise the project activities during project implementation the Board of Directors of FER willapprove the IMWG as a Project Management Committee (PMC). This committee will representboth the regional and federal authorities (see paragraph 2.1 for overview of FER's governancestructure and the role of PMC's).

The project is divided into five components:

Component A - Strengthening of Federal and Regional Fiscal Legislation - this component willprovide technical assistance to improve the existing framework of intergovernmental fiscalrelations. Counterparts for this component are the Ministry of Finance, State Duma, FederationCouncil and the Presidential Administration.Component B - Strengthening of Federal Monitoring Capacity and the Development ofStandards for Regional Financial Management-improving compliance of the regions withexisting federal laws and regulations.

Component C - Assistance to Sub-national Governments in Accounting and Budgeting -strengthening the Government's capacity to monitor sub-national fiscal performance and reformefforts.

Component D - Sectoral Public Expenditure Reviews

2. Regulations and Procedures

The Project Operating manual will cover the project description, project managementsystem, financial procedures, implementation arrangements, disbursement procedures andinternal control procedures. This manual will be presented for Bank's review and approval inaccordance with the Action Plan.

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3. Organizational Structure and Staffing

An Order of the Ministry of Finance was signed on June 29, 1999 establishing a RegionalFiscal Monitoring Unit (RFMU) within the Department of Inter-budgetary Relations, whose rolewill be to monitor regional finance and to manage this project. Initially this is budgeted to havefive MOF staff but this is budgeted to increase to xx over the duration of the Project. This will beheaded by Aleksey Lavrov.

To support the MOF staff in the implementation of the project the RFMU will use anumber of short term consultants who will report directly to Mr. Lavrov. The project designassumes that as consultancy staff will reduce during the life of the project as Ministry of Financestaff are trained and drawn into the division.

FER would perform the functions of the Project Implementation Unit for the Project.During project preparation and implementation, FER will provide procurement, disbursement,accounting and financial reporting services. Individual consultant contracts are being signed byFER but with accountability clearly to management within RFMU. The following changes willbe made in the existing organizational structure of FER (also see Part I for the assessment of theexisting structure). Unlike other projects within FER no separate project group will be formedwithin FER as all technical issues will be dealt with in Fiscal Monitoring Center.

Within the General Services department, two additional procurement specialists will berequired within FER. Operating costs of FER will be financed under this loan. The generalServices department of FER works on a cost-sharing basis with other projects underimplementation by the Foundation.

4. Budget preparation and execution

In accordance with the general budgeting procedure described in the Operating manual,FER's annual operating budget is approved by the Board of Directors. This budget includesFER's operating budget and the budget for individual contracts signed by FER. A ProjectManagement Committee is responsible for approving the project budgets.

In accordance with the procedures described in Part I, the overall annual operating budgetof FER will be submitted for prior approval of the Bank's Country Unit, prior to Approval by theBoard of Directors.

Quarterly budgets have to be prepared for main projects and each disbursement category.The procedure for establishing quarterly budgets will be agreed between FER and the RFMC anddocumented within the Operating manual. Annual budgets will be reviewed in the light ofproject implementation.

5 Project Accounting Systems and Procedures

Under all components consultants contracts will be signed by FER on behalf of RFMC.The agreements reached in order to strengthen project accounting systems are addressed in detailin Part I. Ministry of Finance will issue instructions to the RFMC to ensure records oncounterpart funds are provided to FER for the preparation of financial statements.

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In addition to the above reporting requirements, FER will submit quarterly ProjectManagement Reports (PMRs) to the Bank. For each quarterly report FMC will prepare a textualanalysis of the progress of project implementation, which will be attached to the financial reportsubmitted to the Bank. The composition and format of the Project PMRs will be drafted by FERand the Bank will provide its comments as provided for in the action plan.

FER will be responsible for the preparation of project financial statements for annual audit.Project financial statements should include data on total project expenditures and financing forthe reporting period including counterpart funds. Data on counterpart funding will be collated byFER and will be incorporated into the project financial management statements. The principalsources of counterpart funding are Ministry of Finance staff within the RFMC and Regional Stafffor Component B plus rental of office space in Ministry of Finance and Regional offices.6 Disbursement Arrangements

FER will be responsible for compliance with the Bank's disbursement procedures. FERwill initiate payments from the Special Account and, as appropriate directly from the LoanAccount.

7 Audit Arrangements

As noted in Part I of the assessment, it is recommended that one auditor is procured for allprojects implemented by FER. The appointment of project auditor will be a condition ofeffectiveness.

8 Conclusion

The overall conclusion is that FER has sufficient capacity to implement the proposedRegional Fiscal Technical Assistance Project effectively, although FER need to pay particularattention to the accountability and internal control procedures within the FMC which has noexperience in project management. The following actions were agreed with FER in order to meetthe Bank's financial management requirements prior to project effectiveness.

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Proposed Action Plan for strengthening financial management capacity of FMC

Item Responsible Completed Bank's ActionParty by

1. Development of FER/MinFin September 3, Review and approvemanagement structure within 1999RFTA.2. Board of Directors of FER FER Boardincludes Project Management PresentationCommittee on the RFTA tothe Governance structure ofFER.3. Project Management FER Board Review and approveReports (PMR's) format and Presentationcontent (including quarterlybudgets) agreed with theBank.4. Operating manual on FER, FMC Board Review and approveimplementation of Regional PresentationTechnical Assistance Projectis prepared for Bank's reviewand approval.5. Appointment of the auditor FER Bidding

documentsare preparedby BoardPresentation

The project is certified by a Financial Management Specialist as meeting the minimum financialmanagement requirements prior to Board Presentation. The implementation of the above ActionPlan is a condition of effectiveness.

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Concordance TableRussian Federation

Regional Fiscal Technical Assistance Project

Agreements Reached and Recommendations in the PAD/PR I Corresponding Section of LegalDocuments

Borrower may for the purposes of the Project open and maintain in Article II, Section 2.02 (b)dollars a Special Account in a commercial bank, acceptable to theBank, on terms and conditions satisfactory to the Bank.

Borrower declares commitment to the objectives of the Project, and, to Article III, Section 3.01 (a)this end, without any limitation or restriction upon any of itsobligations under the Loan Agreement, shall carry out the Projectprimarily through the MOF and FER, all with due diligence andefficiency and in conformity with appropriate administrative andfinancial practices, and shall provide the funds, facilities, services andother resources required for the Project.

Borrower, through the MOF, shall enter into a Project Implementation Article III, Section 3.02Agreement with the FER, under terms and conditions approved by theBank.

Procurement of goods, works and consultants' services required for the Article III, Section 3.03Project, financed out of the proceeds of the Loan, to be in accordancewith the "Guidelines for Procurement under IBRD Loans and IDACredits".

Borrower shall cause FER to maintain financial management system, Article IV, Section 4.01 (a)including records and accounts, and prepare fnancial statements, inaccordance with accounting standards acceptable to the Bank.

Borrower shall cause FER to prepare, in accordance with guidelines Article IV, Section 4.02acceptable to the Bank, and furnish to the Bank not later than forty five(45) days after the end of each calendar quarter, a PMR for that period.

MOF shall be responsible for overall management and implementation Schedule 5, Paragraph A Iof the Project by administration of the timely processing of project-related documents for procurement, disbursement and other matters, inaccordance with an internal procedure satisfactory to the Bank.

FER shall be responsible for day-to-day technical implementation of Schedule 5, Paragraph A 3the Project, including preparation of appropriate auditing reports andtheir dissemination to relevant agencies of the Borrower and the Bank.

Borrower shall ensure that FER functions in a manner, and with staff, Schedule 5, Paragraph A 4consultants, facilities and other resources necessary -to thesatisfaction of the Bank- until the completion of the Project.

Borrower, through the MOF, shall be responsible for selecting the Schedule 5, Paragraph B IParticipating Regions in accordance with criteria acceptable to theBank.

Participating Regions to manifest their intention to carry out the Schedule 5, Paragraph B 2Principles of Responsible Regional Fiscal Policy.

FER shall by December I of each year furnish to the Bank for its Schedule 5, Paragraph C Ireview the proposed work program of the FMD, including specificinformation on expected expenditures, account of such activities, andsources of income, as agreed with the Bank.

Borrower shall carry out technical assistance activities through FMD Schedule 5, Paragraph C 2. (a)and FER under tenns of reference satisfactory to the Bank.

Borrower shall promptly fuimish to the Bank through FER a copy of its Schedule 5, Paragraph C 2. (b)findings and recommendations upon completion of technicalassistance activities.

Borrower shall afford the Bank the opportunity to exchange views on Schedule 5, Paragraph C 2. (c)the ex-post review of technical assistance activities.

By December I of each year, the FER shall submit to the Bank for Schedule 5, Paragraph D Ireview the proposed budget and financing plan for the PIU and FMD.

Borrower shall develop, adopt and maintain policies and procedures Schedule 5, Paragraph E Iadequate to enable it to monitor and evaluate the carrying out of theProject and the achievement of its objectives.

Borrower shall prepare, under terms of reference satisfactory to the Schedule 5, Paragraph E 2Bank, and furnish to the Bank on or about November 30,2001 a reportintegrating the results of the monitoring and evaluation activitiesperforned, and on the progress achieved in the carrying out of theProject.

* MOF - Ministry of Finance; FMD - Fiscal Monitoring Division; FER - Foundation for EnterpriseRestructuring